Amid the challenges our economy faces today, such as the rising price of gasoline and the fallout from the subprime market, you may find yourself with more questions than answers about your retirement. Because the financial market continues to be unpredictable, it may be tempting to react quickly during market downturns and concentrate your assets in conservative investment options. However, reacting to a short-term market may potentially have a negative impact on your portfolio's balance in the long run. By investing across asset classes using a diversification strategy, you may be lessening your investment risk because downturns in one asset class may be offset by gains in another. Please note, however, that diversification does not guarantee a profit or protect against loss in a declining market, and past performance is no guarantee of future results. The following articles are designed to provide you with the information and guidance that could help you with what lies ahead for you and your family. Also included are hypothetical examples of how the market can rebound after periods of decline, and they should encourage you to have further discussions with your financial professional to have your investment-related questions answered.

Why the Bear Market Doesn't Matter

In recent months, one phrase has dominated the financial media: bear market.

At first, the question simply was whether we might be headed for a bear market — defined as a 20% decline from the peak. Then, as major stock indexes tumbled near that level, the issue became more precise: At what moment will we hit bear-market territory? When the thresholds were passed, the concern shifted to other matters, such as how long bear markets typically last and how much further stocks typically fall after entering bear territory.

However, rather than getting wrapped up in these issues, you're better off looking at your own portfolio. If you're content with its structure, relax. Market declines are important, but official labels are not.

The Background
As noted above, a bear market is usually defined as a decline of 20% or more in a stock index. It's understandable why certain people, such as academics and other professional market researchers, would require a standard definition. Without it, the history of the stock market could only be described as a series of ups and downs; researchers wouldn't even be able to agree on how many downs had occurred. Only by defining some cutoff points and assigning labels can one take a meaningful look at market history.

The Everyday Non-Effect
Those standards, however, have no relevance for ordinary investors. For that reason, the media attention to the formal definitions is at best a distraction. At worst, it can be harmful. It's a distraction because investors shouldn't base their actions on whether or not the stock market's decline has passed a certain milestone. If you're worried about oil prices, the housing downturn, and the fall in the dollar, for example, those issues have the same degree of importance whether the Dow Jones Industrial Average has declined 18% (a "correction") or 21% (bear market). The same applies to changes in personal circumstance. If your concern over your own job security has heightened recently, inducing you to keep more money in cash in case you need it quickly, the exact level of the stock market shouldn't affect that decision.

Further, the bear-market fixation implies that a downturn is conclusively more damaging if the index is in bear-market territory than if it isn't. But that's questionable. On one particular day this summer, the S&P 500 closed at a level that put it exactly 19.99% below its high. At that point, we were not in a bear market. If the index had recovered, but then spent the next three years hovering in a range between, say, negative 15% and negative 19.99% and then rose decisively, officially no bear market would have occurred. But many investors would most likely disagree — especially those whose stocks or funds had plunged much further than that.

The Potential Harm
Unfortunately, bear-market fixation can cause harm, rather than just act as a distraction. The tone implies that once we enter a bear market, conditions have changed for the worse. Articles tell us how long and deep past bear markets have been, and the implication is that we should batten down the hatches and behave more cautiously.

In reality, an official bear market could last just a day or a month. But articles about "how to handle a bear market" give the impression that once the 20% barrier has been pierced, a door closes behind us, and we're going to be in the soup for awhile. That can be a self-fulfilling prophecy. If people believe that a bear market, once begun, must continue for a certain amount of time (and will likely get worse, as the numerous published charts show past bear markets have done), it might motivate them to sell stocks — thus pushing prices down further.

Don't Fear the Bear
The fact is this: It's possible that the more profitable course may be to buy stocks once we enter a bear market, not sell them. That's not assured; stocks could fall much further. But even contemplating buying is tough to do when every magazine cover or TV segment features a snarling grizzly bear.

A market decline is a serious matter, and it's worthwhile to learn about the issues that caused it. However, it's not worth your time to wonder whether the drop in a stock market index has passed this or that threshold. Leave that to the academics, the brokerage-house researchers, and the people who draw big, scary animals to populate magazine covers.

Past performance is no guarantee of future results. Returns and principal invested are not guaranteed.

Next: Stock Performance During Recessions: 1946–2007

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Stock Performance During Recessions: 1946–2007

Since the stock market is driven by the performance of corporations, it is evident that a relationship exists between the performance of the stock market and the performance of the economy as a whole.

There is no doubt that the state of the economy has a direct influence on stock market performance. This image illustrates the hypothetical growth of a $1 investment in the stock market from January 1, 1946, through December 31, 2007. The shaded regions represent 10 economic recessions in the U.S. since the beginning of 1946.

Click chart to view enlarged version

Stocks in this example are represented by the Standard & Poor's 500®, which is an unmanaged group of securities and considered to be representative of the stock market in general. An investment cannot be made directly in an index. Recession data is from the National Bureau of Economic Research (NBER). The NBER does not define a recession in terms of two consecutive quarters of decline in real GNP. Rather, a recession is a recurring period of decline in total output, income, employment and trade, usually lasting from six months to a year, and is marked by widespread contractions in many sectors of the economy. Past performance is no guarantee of future results. Hypothetical value of $1 invested at the beginning of 1946. Assumes reinvestment of income and no transaction costs or taxes. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008

Notice that the index line usually drops either before or in the middle of each shaded region. This indicates a clear relationship between the performance of stocks and the economy as a whole.

Not every stock market downturn corresponded with an economic recession. For example, sharp stock market drops in 1962, 1966 and 1987 did not coincide with economic decline. Conversely, the U.S. economy remained stagnant for much of 1991, while the stock market posted impressive returns.

Next: U.S. Market Recovery After Tragedy

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U.S. Market Recovery After Tragedy

After tragic events, U.S. stock prices may initially drop, but they may gradually improve in subsequent months and years.

The chart below illustrates the cumulative return of stocks following four tragic events in American history. In the short term, uncertainty from such external shocks may create sudden drops in value. For example, stocks had negative returns six months after the attack on Pearl Harbor. Over a longer period of time, such as one and three years, however, returns were positive.

U.S. Market Recovery after Tragedy Cumulative Return of the S&P 500® after Tragic Events

Click chart to view enlarged version

Stocks in this example are represented by the Standard & Poor's 500®, which is an unmanaged group of securities and considered to be representative of the stock market in general. Calculations assume monthly data. The month the event occurred is excluded from the return calculations. An investment cannot be made directly in an index. The data assumes reinvestment of all income and does not account for taxes or transaction costs. Past performance is no guarantee of future results. Returns reflect the percentage change in the index level from the end of the month that the event occurred to one month, six months, one year, and three years after. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008

Fear and uncertainty may lead investors to sell their investments, putting downward pressure on prices. Trading on such emotions can be detrimental to a portfolio's value. By selling during downward price pressures, investors may realize shortterm losses. Then, as they wait and hesitate to get back into the market, they may miss parts of the potential recovery.

In the past, the United States has survived tragic events, from the Pearl Harbor incident in 1941 to the September 11 terrorist attack in 2001. While stocks typically dropped in the first few months following the tragedies, they recovered in the long term.

Returns and principal invested in stocks are not guaranteed.

Next: Investing With Annuities

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Investing With Annuities

If you are interested in a financial product that could offer guarantees to provide you with income for life, you can consider annuities.

An annuity can provide that guarantee. However, please note that guarantees are based on the claims-paying ability of the issuing insurance company.

Chances are, when you hear the word "annuity" you think of the traditional annuity — known in the financial services industry as a fixed immediate annuity. Annuities are long-term financial products designed for retirement purposes. In exchange for money you pay (often one lump sum), the issuing insurance company guarantees to pay you a fixed amount each year for life (or for a specified period), based on your age when you purchase the contract. The guarantee of income for life is what makes such an annuity an attractive idea to people entering retirement. There are, however, drawbacks. Once the contract is annuitized, there is no additional asset growth. You have no access to or control over how your assets are invested.

If that's a tradeoff you don't want to make, you might want to consider the features of a variable annuity. Within a variable annuity, you are invested in a number of underlying portfolios, and the value of your investment can vary based on the market performance of the investment options you choose. Many of the variable annuities on the market today not only guarantee a stream of income you can't outlive, they feature "living benefits." These optional features, available for an additional fee, can allow you to stay invested and potentially grow your assets. At the same time, they guarantee you a minimum level of income no matter how your investments might perform. Today's variable annuities typically offer a Guaranteed Minimum Income Benefit (GMIB) and/or a Guaranteed Minimum Withdrawal Benefit (GMWB). Please note that guarantees do not apply to the variable investment options.

Guaranteed Minimum Income Benefit (GMIB)
A GMIB guarantees a minimum level of future income — regardless of market performance — based on your contribution(s) (your Benefit Base) and annuity purchase factors set when the contract is issued. This type of benefit is exercised by annuitizing the contract after owning it for a specified number of years.

During the years before exercising the GMIB, you have the potential to increase the level of your future income with built-in percentage increases (Roll-Ups) to the Benefit Base and/or the ability to step up the Benefit Base to market value when investments perform well. During this period, withdrawals up to a specified percentage of the Benefit Base can provide income. The withdrawal limit usually offsets the Roll-Up percentage and thus maintains the level of the Benefit Base.

There are contract limitations and fees and charges associated with annuities, which include, but are not limited to, mortality and expense risk charges, sales and surrender charges, administrative fees, and charges for optional benefits. A financial professional can provide cost information and complete details.

Withdrawals from annuities are subject to normal income tax treatment and, if taken prior to age 59½, may be subject to an additional federal income tax penalty. Withdrawals may also be subject to a contractual withdrawal charge.

Please consider the charges, risks, expenses and investment objectives carefully before purchasing a variable annuity. For a prospectus containing this and other information, please contact a financial professional. Read it carefully before you invest or send money.

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