Increasingly, economists and stock market pundits are sounding the alarm over an imminent bear market.

  • Economist Nouriel Roubini predicts that the Dow Jones Industrial Average will fall by 20%.
  • Reuter’s financial blogger Felix Salmon offers a similar warning, telling investors that unless you're a large institution, get out of the stock market right now. “Stocks are dangerous things to own,” writes Salmon. "We are entering an era of massive volatility. You, as an individual investor, just simply don't have the risk appetite to be able to deal with that kind of volatility."
  • Economist and Dow Theory Letters Richard Russell says this in a May 18 note about the stock market: “Do your friends a favor. Tell them to 'batten down the hatches' because there's a HARD RAIN coming. Tell them to get out of debt and sell anything they can sell (and don't need) in order to get liquid. Tell them that Richard Russell says that by the end of this year they won't recognize the country. They'll retort, 'How the dickens does Russell know — who told him?' Tell them the stock market told him.”

Bad market mojo or not, It’s up to you to decide whether to move your 401(k) money out of the stock market and into the so-called safe haven of bonds. But consider these factors before you bail on the stock market and move into bonds.

What’s “Job One?”

Your overall goal is to protect your 401(k) nest egg — to a point. If you’re younger and have 20-30 years until retirement, you can likely absorb a big stock market hit. Historically, stocks have proven very elastic. They snap back significantly after big market declines (just like stocks did in 2009, when the Dow Jones Industrial Average snapped back by 50%; that after a 2008 performance where the DJIA fell by 35%). If you jump into bonds now, you could miss the rebound when stocks start climbing again.

Are you experienced?

According to Hewitt Associates, only 16% of all U.S. 401(k) investors actually made a funds transfer in 2009. If the other 84% of 401(k) investors were in bonds, they missed out on a big year in the stock market. Hewitt has a reason for that “staying the course” mentality among 401(k) participants. “While it’s encouraging that most workers stayed the course throughout the market’s roller coaster fluctuations, most did so simply because they were disengaged with the retirement saving process or too paralyzed with fear and confusion to touch their 401(k) plans,” says Pamela Hess, Hewitt’s director of retirement research. “If employees continue to ignore their 401(k) plans, they’re hurting themselves by letting the market dictate their retirement strategy.”

What’s your “risk” factor?

There’s no law that says you have to sit idly by and watch your 401(k) proceeds erode due to a declining stock market. Let’s face facts, stocks are riskier than bonds. If you can accept the historically lower returns from bonds, and it helps you sleep better at night, allocating more fixed-income products into your 401(k) may work for you. Your returns may be lower over the long-term, but so will your blood pressure.

Focus on Target-Date Funds

A Fidelity Investment study shows that investors who use target-date (often called “life cycle funds”) tend to see better performance from their 401(k) investments. Target date funds automatically reset your 401(k)’s asset allocation based upon pre-determined criteria specific to your retirement needs. Most target-date fund strategies are based on age. So if you feel uncomfortable moving your money around on your own (but still want to avoid big stock market plunges) a target-date approach may take that weight off your shoulders — and still get you out of potentially big market messes.

More for Your Money

If you do opt to remain in stocks, one advantage you’ll get no matter what happens is you’ll be buying fund shares at lower prices (if the stock market continues to tumble). It’s simple economics — you buy low when prices are low, thus accumulating more 401(k) fund shares in the process. That said, you have to keep contributing to your 401(k) to reap the benefits of what stock market gurus call “dollar-cost averaging.”

Look for “Stable Value”

If you do move to bonds, consider stable value funds (which are mostly composed of fixed-income investments). Such funds offer a guaranteed minimum return and a thus a little shelter from any stock market tsunamis — and they’re increasingly being used by 401(k) investors. During the last stock market meltdown of 2008 and early 2009, Prudential Investments (Stock Quote: PRU) reported that 26% of all its fund account assets came from stable asset funds in the second quarter of 2008. But by the first quarter of 2009, that number rose to 44%. As the stock market resumed strength, that number once again fell to 37% as more investors left fixed-income funds for stock funds.

When it comes to moving your 401(k) money out of stocks and into bonds, there are no crystal balls that tell you what’s going to happen.

Statistically, though, investors who keep their money in equities and ride out stock market storms usually make out better than those who hop from stocks to bonds when the financial weather gets rough.

Overall, it’s a personal choice and it’s yours to make. But use the tips above to increase your chances of making the right call.

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