The Relentless Economic Cycle, Predictable For Eight Centuries – Banks Again Get Bailed Out By Clueless Politicians. Their CEOs Pocket New Bailouts, Splitting With The Super Rich. The Recession Goes On For A Few Years, Again. Growth Slows, Austerity Increases With Unemployment And Fed Rates.

By Paul B. Farrell, MarketWatch

It’s not complicated. Prepare all you want. But the bull ends. The market sinks deep into its third bear of the 21st century. Wall Street loses another $10 trillion of our retirement money.

Banks again get bailed out by clueless politicians. Their CEOs pocket new bailouts, splitting with the Super Rich. The recession goes on for a few years, again. Growth slows, austerity increases with unemployment and Fed rates.

That’s the relentless economic cycle. Predictable for eight centuries.

But “it’s not complicated.” That’s the message in the fab-u-lous ATT ads with those cute kids and their straight-man narrator all sitting in little chairs in a kindergarten classroom. Kooky kids. Yes, Ad Age says ATT’s hyping its brand in mobile networks:

“The kids’ imaginations turn boring brand attributes like multitasking or download speeds into loads of fun …. Case in point: Dizzy boy … is able to wiggle both his head and his hand at the same time. Or the precocious girl who notes that being fast is necessary to avoid being bitten by a werewolf. Or the kids in a new NCAA spot who discuss how to do two things at once in basketball, with the pickle roll.”

Werewolves of Wall Street, Washington will soon ‘turn’ America

Dizzy boy? Cute girl worrying about werewolf bites? The pickle roll in a basketball game? If you have an imagination, you already know the right answers. Yes, these kids remind me of the endless questions readers ask about what to do when the market peaks, as it always does, like now, in the fourth or fifth year of a bull market, then crashes.

It’s not complicated, folks. Focus on the dizzy boy, or the pickle roller, better yet, the precocious girl. Imagine, is she really worried about werewolves? Naw, she’ll roll with the punches. You should too.

Investing is not really complicated. Nor are your investment strategies that complicated. Limited yes. To four strategies. But when the market peaks, the bubble bursts, when you see it crash a couple thousand points, when you wake up to another recession and our clueless politicians are conned into bankrupting taxpayers again, bailing out Wall Street banks, again, and you’re wondering about your strategies, again … remember, “it’s not that complicated.”

You’ve been down this road before. This is the third time in this 21st century. You should be used to it by now. First the bear/recession after the 2000 dot-com crash dragged on for 30 very long, agonizing months, far longer than the nine-month average. Then the 2007-2009 bear recession also got agonizingly longer than usual.

Now the current bull is four years old, ancient by historical averages. So a new bear crash is a no-brainer.

Now what? Think like a 5-year-old kid … it’s not really that complicated

Seriously, you must be used to these painful cycles that Wall Street’s too-dumb-to-fail bankers and Washington’s dumb-and-dumber politicians keep subjecting American investors to. It’s not really that complicated. Our so-called leaders really don’t know what they’re doing. But get this, you do in fact know what’s best for you.

So let’s stop kidding ourselves, folks. Get real, this bull’s ready to do the pickle roll in the pasture. Think of the dizzy boy. And that precocious fearless little girl sitting in the small chair in kindergarten. Crashes? Bear market? Recession? They’re like her little fears of being bitten by a werewolf. She’d rather be a human: “It’s not complicated.”

You’d rather be a human, a fearless investor, not turned into a werewolf like a Wall Street banker or Washington politicians. You know you only have four uncomplicated strategies.

So here’s a quick review. Seriously, you already know all four choices … it’s not really that complicated, admit it, pick one, roll with it, do what feels right for you.

1: Cash out (but only if you’re super savvy)

First big choice: Should you cash out, lock in gains, then wait patiently until prices bottom to buy bargains? Sounds great. For guys like Buffett. The Dow lost 4,436 points in 2000-2002. I remember getting hundreds of responses to a column about that crash. One investor hit the nail on the head: America’s biggest problem is our totally out-of-control debt, and it just keeps getting worse:

“They all fall into the category of debt: We’re living beyond our means, spending more than we take in and borrowing to make up the difference.” It’s not complicated. Simple as that, we’re our own worst enemy, and we keep sinking deeper as Washington borrows $1 trillion new debt every year to finance out-of-control spending.

For a long time indecisive readers have been asking the obvious, like the kids in that kindergarten: “If you’re right about a crash coming, Paul, when do I act on it?” Back in 1999 one told me “I thought of moving my 401(k) to bonds. Didn’t. Lost 40-50%. Ouch!”

The signals were so obvious. In early 2000 as the dot-com market peaked, too many absurd 100%-plus mutual fund returns and sky-high P/E’s screaming, “Sell, Sell!” Paul Erdman, a well-respected MarketWatch economist actually did dump his stocks. But few listened. His fixed-incomes returned roughly 10% annually during the 30-month bear, while the S&P 500 crashed into bear market with losses of $8 trillion.

2: Cash in (day trading, double down, shorts, puts, calls, action!)

Successful traders are a special breed unto themselves. Fortunately, a majority of America’s 95 million Main Street investors figured out long ago that active trading really is a loser’s game for average investors with full-time jobs.

Why? They tried, lost and read studies like the ones by finance professors Terry Odean and Brad Barber and their seven-year study of 66,400 Wall Street brokerage accounts.

Their bottom line: “The more you trade the less you earn.” Buy-and-hold investors in their research turned over their portfolios just 2% a year. Active traders churned their portfolios an average of 258% annually, but their net returns were a third less than their buy-and-hold competition. One-third less. And that’s before deducting “opportunity costs” and the added stress many traders complain of.

3: Sit tight, do nothing and ride out the storm

Yes, do nothing: Seriously, it’s not that complicated if you already have a well-diversified portfolio of stocks or one of our Lazy Portfolios of no-load index funds. Most don’t. The Ted Aronson’s Lazy Portfolio has averaged almost 10% annually the past decade, none less than 8% annually. When I asked Aronson about selling before a coming bear, he warned:

“For good reasons and bad, I’d hold tight. The good include my faith in capitalism and its ability to weather a storm, even one of biblical proportions. The bad reason is, I have no faith in my ability to time this sort of thing. Even if I got out in time, I probably wouldn’t be able to correctly time getting back in!”

Warning, trying to time the market is a dangerous fool’s game, and that’s from a guy who manages $21 billion.

4: Start building your own Lazy Portfolio today!

Wall Street, fund managers and the brokers have America’s 95 million Main Street investors trained like little puppy dogs, brainwashed to focus narrowly on their tips and hot stocks. These insiders get rich on “the action,” all the buying, selling, trading; or charging you hefty annual fees for baby-sitting your portfolio.

Yes, it is time to build your own Lazy Portfolio. It’s not complicated to see why their time has come: For decades Vanguard founder Jack Bogle has been warning that active funds skim and pocket a third off the top of your returns.

Now InvestmentNews reports that America’s second largest pension funds, CalPERS, the $255 billion California Public Employees Retirement System that’s already half in passive portfolio strategies exactly like our Lazy Portfolios, is considering going all in 100% passive.

The story behind the Coffeehouse Portfolio is a pitch-perfect argument for creating your own Lazy Portfolio, today, before the next crash. Back in the red-hot go-go days of the late 1990s Bill Schultheis, a 13-year Smith Barney, broker quit and wrote a best-seller, “The Coffeehouse Investor,” for people who wanted solid returns “without spending one ounce of energy” playing the market.

Unlike Erdman, Schultheis didn’t cash out, go all-bonds and just wait. Instead, he put just 40% in bonds, creating a well-diversified portfolio with 10% in the other categories. His “Coffeehouse philosophy” is so darn uncomplicated, just three principles: Build a well-diversified portfolio, own the entire market with low-cost, no-load index funds and develop a long-term financial plan and save regularly.

A bold move! You bet: Because back in 1999 over 100 mutual funds were delivering 100%-plus returns. And their investors were expecting to retire rich (and early!), thanks to those skyrocketing dot-com returns. Wall Street laughed at Schultheis “wasting” 40% of his money on low-return bond funds in his lazy “Coffeehouse Portfolio.”

But the laughing stopped during the 2000-2002 bear recession. His portfolio beat the S&P 500 by 15 percentage point all three bear years, with no rebalancing, no trading, no tinkering with allocations. Meanwhile, hundreds of technology companies went bankrupt, Nasdaq dropped 80%, and stocks lost $8 trillion in a 30-month recession.

So what’s your strategy? Think of the dizzy boy having fun. The pickle roller. The fearless little girl sitting in a small chair in kindergarten, rolling her eyes. Crashes? Bear markets? Recession?

You already know you have only four very uncomplicated alternative strategies for any bear recession. And the secret is out: You also know which of the four choices is yours … it’s not really that complicated, admit it, decide, go with it … do what feels right, for you.

Paul B. Farrell is a MarketWatch columnist based in San Luis Obispo, Calif. Follow him on Twitter @MKTWFarrell.