What to do about your nest egg? Read this

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With the headlines today noting that stocks are back to 1997 levels, at least as measured by the Dow industrials and the Standard & Poor’s 500 index, the psychological pain is likely to become intense for many buy-and-hold investors.

Time to exit before Wall Street wipes out even more of your nest egg?

You know the risks: Stay, and if the losses worsen you’ll hate yourself for sitting tight.

Sell, and if the market turns up from here you’ll feel suckered for having jumped ship with stocks already down 50% or more from their peaks.

The S&P 500 on Monday fell through its Nov. 20 low of 752.44, which had been the low-water-mark in this bear market.

The 2009 leg of the market’s decline has been a less-volatile affair, and on lower trading volume, than what investors lived through during the plunge last fall. That has encouraged optimists who believe the market still is in the process of carving out a bottom -- as opposed to readying for another deep dive.

Something else that encourages the bulls this time around: Even though the Dow and the S&P 500 fell to their lowest levels in 12 years, far fewer stocks overall made new 52-week lows on Monday than on Nov. 20, notes Art Hogan, veteran market analyst at Jefferies & Co. in Boston.

The number of new lows across all U.S. markets was 1,345, compared with 4,174 on Nov. 20 and an even bigger 6,748 on Oct. 10. That declining pattern suggests that investors believe plenty of stocks already are cheap enough for whatever the economy will dish out.

But that’s no guarantee the market won’t dive off the cliff again, particularly if more investors come to believe there is no economic recovery on the horizon, or that the ravaged financial system is no closer to stabilizing.

What to do? For many investors in recent months, corporate and municipal bonds have been the logical alternative to stocks. Bonds have risk, but a diversified, high-quality bond portfolio earning regular interest provides a capital-preservation element that stocks can’t.

The trade-off is that bonds won’t provide the kind of growth that stocks will give you when the market finally turns around. And if inflation begins to rise again, the conversation about fixed-income securities like bonds will take on a different, less-friendly tone (especially in the case of low-yielding U.S. Treasuries).

But as an alternative to earning virtually nothing in a cash account -- and losing a lot more in stocks -- diversfied bond funds still make sense right now if you feel that you’ve got to reduce your equity holdings.

‘We’re recommending that if it helps clients sleep at night, then overweight the bonds,’ said John Kleponis, a portfolio manager at Yosemite Capital Management in Tustin.

I list five well-known bond mutual funds at the top of the accompanying chart, and five big stock funds at the bottom, just to show the range of returns last year and this year. Even when bonds lose, they’re rarely going to have as bad a year as stocks can have.

If total safety of principal is your goal, however, forget bonds and forget stocks. Cash is your only real option.

-- Tom Petruno