If you had to pick a time to be buying stocks, you could not do much better than 1983 to 1986. The return on stocks from 1973 to 1982 had been zero. Exhausted investors had pretty much given up on stocks and had switched their capital to things like gold, stamp collections and farmland. Oil was a big winner back then, along with precious stones and other “hard” assets.

Stocks, long neglected, rallied over 50 per cent in 1983 and then kept going, buoyed by stronger earnings that came on heels of the economy shaking off the shackles of an intense recession. Oil prices were coming down and interest rates were finally easing in the face of tamed inflation.

It would be a couple years before my first education in bear markets would show up. Eventually, Black Monday in October of 1987 stopped the party for a while. A precipitous 25-per-cent one-day drop caught the world’s attention and reminded us all that stocks went up most of the time, but not all of the time.

Bear markets all feel about the same. In retrospect they are short-lived, but when you go through one, it feels like it lasts forever. A friend of mine once said it was like being on a water wheel. While most of the time the wheel is out in the open air, the time under water always seems to last longer. You have to hold your breath.

We are in some remarkable times right now. The weakness in the U.S. housing market has uncovered a house of cards built on consumer credit and subprime mortgages. Today, one in every 500 homes in the U.S. is being foreclosed. The financial institutions that extended credit assuming that they could get their money back by repossessing real estate did not count on a 25-per-cent drop in house prices. This precipitous drop has eliminated the collateral on a lot of debt secured to real estate.

Today, “safe as houses” does not seem to hold true. The past year’s 20-per-cent decline in the world stock market index is significant, but many investors have been stunned by even greater drops in what most thought were “safe” investments. A year ago Bank of Montreal shares were $71; today, they trade around $40. Investors who bought CIBC shares have suffered even more, giving up 50 per cent of their value in the last 12 months. Berkshire Hathaway, representing the investment wealth and wisdom of Warren Buffet, has also declined about 20%.

It is our nature to extend current experience into the future. The various stock markets will recover, but it sure doesn’t feel that way each time you look at your statement. While I cannot tell you when the recovery will arrive, I can tell you it will.

There is a big difference between temporary declines and permanent damage. Temporary declines happen to broadly diversified portfolios. Permanent damage can happen when your portfolio is concentrated. There are a few pitfalls, my hard-won past experience tells me, to avoid while we wait for the broad markets to bounce back.

The first pitfall is related to our tendency to extend past experience forward. The fact that oil and gold have been remarkable investments over the past few years does not mean they will continue to do well in the future. You should, by all means, have an exposure to oil and gold in your portfolio, but dumping everything you have into what did well last year becomes a bet, not a portfolio. Bets tend to be a win-or-lose proposition. While winning is great, losing a bet is usually too great a risk when it comes to your life savings.

Oil has not always been the big winner. I attended an investor conference in 1996, sponsored by the firm for which I worked at the time. The price of oil was about $20 per barrel and our firm had been recommending shares in a company called Renaissance Energy. Renaissance was a very well-managed Canadian oil company that had traded at $51 a year earlier when the firm began to recommend it. The price at the time of the investor conference was $15.

The presenter was still recommending the purchase of shares and joked that “if you were dyslexic you really haven’t noticed any difference over the last year.” This was funny to almost everyone who did not own any shares.

The presenter, of course, was absolutely correct. Investors should have oil in their portfolio, but past experience told them it was a loser. Those investors wary of oil would be right for a few years to come.

The current market malaise will end one day. Investors who are diversified will recover and many investors who are not diversified will lose their money. Today, a lot of people believe they are being more conservative by putting a lot more their eggs in last year’s winning basket. If you are tempted to join them in the rush to oil and gold, just be sure that you are OK with both sides of the bet.