Right now, stocks look uglier than the Wicked Witch of the West having a Bad Hat Day. So what do you do if you’re convinced we’re in a bear market…and stocks may be at today’s levels two to three years from now?

Here are your options:

1) Take your lumps. Say you can’t really predict the markets, and lose 20% to 30% of your portfolio’s value over the next few months (or years). Tell yourself you’ll eventually ride the recovery, and after all is said and done you’ll average 10% a year or so (6% or so after inflation). Accept that’s the best you can do.

My verdict: Hogwash. You don’t have to leave your money prone to the big dips. You may not be able to predict every crest and ebb of the market, but you can spot the big trouble heading your way like a pack of sharks, and have the prudence to swim to safer waters.

2) Go to cash. This is where you throw in the towel, accept 2% to 3% yields on safe cash (although you’re losing money in inflation-adjusted terms). You wait until you hear the “all clear” signal, and then you cautiously head back into the markets.

My verdict: This choice makes some sense, except the “all clear” signal never sounds as “all clear” as you like. Sometimes the “all clear” can be a false rally, or just another landing on a long flight of stairs down. Or you can wait so long for the rally to be verified that you miss the most compelling values the bear market created for you. We think it’s better to stay invested, but stick to the best value markets and sectors.

3) Opt for dividends. Dividends make up around 33% of long-term total returns of the market. So the wise ones in the investment world say you should always go for dividends.

My verdict: It’s not always as wise as it sounds. Buffett has never paid a dividend and rightly so. He can reinvest the earnings far more profitably for you than pay them to you in a taxable event. So why not let him? His reinvestments, when done well, will show up in increasing retained earnings and in a greater store of income-producing assets bought with those earnings. Microsoft, similarly, never paid a dividend for 20 years while it was making its investors the biggest returns.

Also, lately blue-chip companies from Sprint (NYSE:S) to GM have been slashing their dividends to generate some emergency cash. (Last week, Wachovia (NYSE:WB)announced they’re cutting dividends to five cents a share to help raise US$5 billion.) So dividends are dandy, but they’re not the whole story - especially when companies are taking their dividends back.

So I say, if you can find value with a high dividend during a bear market, take it - particularly if it’s a guaranteed dividend that a company can’t take away when times get hard. The regular cash payments will help you tolerate the ups and downs of the share price.

4) Take advantage of extraordinary opportunities for high income now. There are certain structured vehicles that will pay far more than even the best dividend paying stocks. In fact, you can collect 15% and 13% on investments related to Apple (NASDAQ:AAPL) and Home Depot (NYSE:HD). You don’t get any of the upside, but that’s okay. You’re not trying to swing for the fence here. You’re bear market investing. The main premise is there isn’t going to be much of an upside if any at all! And your downside is reduced. On many of these investments, the stock has to fall 20% or even 40% before you risk loss. But you collect 10%, 15%, or 20% in cash all the while, as the market gyrates.

My verdict: This is the best option by far.

Lately, I’m researching some of the special “extreme dividend” payers that give you all the benefits of these extraordinary opportunities. They pay far more than the best dividend blue-chips. Plus, unlike Wachovia or Sprint, these extreme dividend payers can’t stop paying you dividends anytime soon.

These types of extreme dividend payers may not be for everybody, but they sure make a lot of sense if you’re looking for continued income throughout this bear market.

Guaranteed Cash Payments, Low Initial Cost, and
100% Investment Protection

As I mentioned, these payers pay out huge “cash dividends” delivered directly to your account every month. All of these extreme dividend payers require very low initial investments. Many offer full, 100% investment protection from any losses.

How about “win - win” investments? If the stock goes up you win…it goes down you still win. Plus, these investments are great for your IRA.

I’ve only found one drawback to this type of investing. It’s that some of these investments have longer holding periods (2 -5 years). But many are totally liquid and are traded on the major U.S. exchanges, so you can easily avoid holding them that long.

Moral: Don’t just duck your head in cash or take your lumps in this market. Instead, go far outside the mainstream for greater protection, and guaranteed income with these incredible opportunities.

DAVID NEWMAN, Market Analyst

Source: Ride Out a Bear Market… and Come Out Richer in the End