Feb. 28 (Bloomberg) -- You didn't listen. You ignored the hints. Fat and happy with a four-year bull run in global equity markets, you dismissed the skeptics as defeatists and scaremongers.

After a 9.2 percent plunge in China's Shanghai and Shenzhen 300 Index caused a global sell-off, investors have two options: They can indulge in self-pity and do nothing while their holdings risk further damage, or they pull themselves together and take action that might help preserve gains and cut future losses.

Nobody knows for sure how far markets will fall. Even so, some folks with solid credentials are predicting that yesterday's selling won't be short-lived.

``I, as an investor, would be taking some precaution here and selling rather than aggressively buying the dips,'' Marc Faber, who manages about $300 million in assets as founder and managing director of Marc Faber Ltd. in Hong Kong, said in an interview with Bloomberg News yesterday.

``And in three months' time or so, we'll have to see how the situation looks at that time,'' he added. Faber, publisher of the Gloom, Boom and Doom Report, is credited with having predicted the 1987 stock-market crash.

Strategists at BCA Research in Montreal take a similar tack, especially regarding China. ``We would not be surprised to see a 20-percent-to-30-percent shakeout before the bull market resumes, and advise clients to stand aside,'' the firm said in an e-mailed note to investors yesterday.

Belkin's Models

Michael Belkin, president of Belkin Ltd., a firm in Bainbridge Island, Washington, that uses quantitative models to forecast movements in financial markets, turned bearish in January. He says markets tend to revert to their 200-day moving average and eventually to their 200-week average.

That translates into potential declines of 6 percent to 10 percent in the Standard & Poor's 500 Index; 7.1 percent to 28 percent in the Dow Jones Stoxx 600 Index in Europe; 10 percent to 29 percent in the Tokyo Stock Price Index; and 13 percent to 38 percent in the Morgan Stanley Capital International Emerging Markets Index.

``Liquidations of complacent bubble markets can turn into gymnastic exercises with steep declines followed by sharp bounces, followed by more declines,'' Belkin wrote in a Jan. 28 note to investors. ``Overextended global financial markets are probably on the verge of a liquidation that could feed on itself as leveraged derivative positions get margin calls.''

Protective Action

Why should we listen to such warnings? Belkin -- or at least his black box -- correctly forecast the Nasdaq Composite Index's rally in late 1999, the dot-com crash of March 2000 and the bull market in technology shares that began in late 2002. This year, he also predicted the May-June sell-off that engulfed global markets and in late July was right about the rebound.

Now that you have got the message, it's time to take some protective action. If you buy Belkin's doomsday scenario or think Faber is on target, one option is simply to retreat to the sidelines and park your cash in money markets or short-term government securities.

If you are really gutsy, you could short an exchange-traded fund that tracks a number of regional markets, a specific national stock market or an industry group.

In a Jan. 8 Bloomberg TV interview, Faber recommended gold, the traditional investment for hell-in-a-hand-basket occasions. He said the Federal Reserve would ignite inflation by responding to plummeting markets with aggressive monetary-policy easing.

Defensive Stocks

Many investors, however, can't liquidate all their securities holdings, invest in gold or sit on large amounts of cash. What's more, fund managers are usually reluctant to exit rising markets so they don't risk underperforming their peers.

A compromise is to overweight traditional defensive industries at the expense of more-cyclical ones. That would mean loading up on health care, utilities and consumer staples, such as food, beverage and tobacco stocks. In bear markets, they should do better than technology, materials and consumer discretionary companies, such as autos, leisure and restaurant shares. Don't forget, you can outperform and still lose money.

Merrill Lynch & Co. strategists also advise quality in fixed-income markets. The yield difference between high-yield and U.S. Treasury bonds would have to widen by only 50 basis points for Treasuries to outperform junk during the next 12 months, they said in a Feb. 13 report. If you think that's a high hurdle, in 2000, spreads widened by 440 points.

The Merrill analysts also recommend Treasuries and high- quality, investment-grade corporate bonds with maturities of five to 15 years and comparable U.K. and euro-area securities. In Japan and Canada, they suggest shorter maturities.

Concern about a deep market slump may prove to be the stuff of worry warts. Yet on Aug. 26, 2005, then Federal Reserve Chairman Alan Greenspan noted that ``history has not dealt kindly with the aftermath of protracted periods of low-risk premiums.''

He usually knows what he is talking about.

(Michael R. Sesit is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: Michael R. Sesit in Paris at msesit@bloomberg.net

Last Updated: February 27, 2007 19:12 EST