With 2008’s bloodbath early in the year, investors want to know what they should do. Should they panic and sell everything and move into cash, or should they hold on and keep absorbing market losses?
Obviously if I actually could predict the future, I wouldn’t be writing this. Rather, I’d be simply telling you exactly what is in store for you. But while none of us can see into the future, examining data from the past may help us shed some light on the current market situation.  Based on some of your recent concerns expressed to us from WBT members, we’ve decided give some insight on how we are handling the increased volatility in the market.   I've included a brief explanation of what guides our strategies.

"Far more money has been lost by investors in preparing for corrections, or anticipating corrections, than has been lost in the corrections themselves." Peter Lynch, Worth (September 1995)

On January 21, 2008 the global equity markets all collapsed. In just that one day, stock markets fell from about 5 percent to as much as 10 percent. For some markets it was the worst day since the Great Depression. And the Australian market had its worst day ever. The U.S. market, which was closed for Martin Luther King Day, saw the futures market trading down over 500 points ahead of the opening on the 22nd. This type of market move generally leads to panicked selling. And the media fuels the frenzy.  As we have learned to expect, we received phone calls from the clients wanting to discuss what investors should be doing in light of the bear market spreading around the globe. What I find amusing is that I always give the same answer-investors should do nothing except adhere to their well-thought-out investment and financial plan (assuming they had one).
While it is tempting to believe that there are those that can predict bear markets and, therefore, sell before they arrive, there is no evidence of the persistent ability to do so. On the other hand, there is a large body of evidence suggesting that trying to time markets is highly likely to lead to poor results. For example, one study on the performance of 100 pension plans that engaged in tactical asset allocation (a fancy term for market timing, allowing the purveyors of such strategies to charge high fees) found that not one single plan benefited from their efforts.  That is an amazing result as randomly we should have expected at least some to benefit.  Another study also found some amazing results. For the twelve years ending in 1997, while the S&P 500 Index on a total return basis rose 734 percent, the average equity fund returned just 589 percent, but the average return for 186 market timing funds was a mere 384 percent, about half the return of the S&P 500 Index.  A third example of the futility of trying to time the market is the finding from a Morningstar study. They found that investors in mutual funds on average significantly under perform the very funds in which they invest. In other words, the dollar-weighted returns of investors are below the time-weighted returns of the funds in which they invest. The reason for this seemingly strange outcome is that investors tend to buy after periods of strong performance and sell after periods of weak performance. Buying high when greed takes over and selling low when panic sets in is not exactly a recipe for financial success. Unfortunately, it is the way most investors act.

Warren Buffett's views on market-timing efforts are best summed up by the following from the Annual Shareholder Letter of Berkshire Hathaway:
"Over the 35 years, American business has delivered terrific results. It should therefore have been easy for investors to earn juicy returns: All they had to do was piggyback Corporate America in a diversified, low-expense way. An index fund that they never touched would have done the job. Instead many investors have had experiences ranging from mediocre to disastrous. There have been three primary causes: first, high costs, usually because investors traded excessively or spent far too much on investment management; second, portfolio decisions based on tips and fads rather than on thoughtful, quantified evaluation of businesses; and third, a start-and-stop approach to the market marked by untimely entries (after an advance has been long underway) and exits (after periods of stagnation or decline). Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful.  Investing is simple, but not easy.  The simple part is that the winning strategy is to act like the lowly postage stamp that adheres to its letter until it reaches its destination. Investors should stick to their asset allocation and trust their managers to know what assets continue to make the grade in each asset class. The reason it is hard is that it is difficult for most individuals to control their emotions-emotions of greed and envy in bull markets and fear and panic in bear markets. In fact, bear markets are the mechanism that serves to transfer assets from those with weak stomachs and without investment plans to those with well-thought-out plans-with the anticipation of bear markets built right into the plans- and the discipline to adhere to those plans.”

The bottom line: If you don't have a plan, develop one. If you do have one, stick to it.  Your allocation is by far the most significant contributor to your success, not the illusion of market timing.  An interesting article recently spoke about previous market reactions to recessions. Whether we are in one or not is subject for another time.  Recessions on average last 216 days, or just over seven months, and stocks post an average 8.64 percent decline during the first half of the pullback, according to Citigroup data dating back to 1953. That actually doesn’t sound too bad compared to the 10% we are down from high in October. Anyway, we are more than half way through this historical cycle.  So what’s the good news? While the first half of a recession can punish stocks, the second half tends to reward investors. During the nine recessions dating back to 1953, S&P 500 stocks have gained 13.17 percent on average in the latter half of a recession, according to Citigroup.  Let’s hope history repeats itself again this year.  Despite what happens in the remainder of 2008, there are some important strategies to employ whether we are in a bear or bull market.  I’ve outlined them below:

1. Determine if you are taking unnecessary risks in your allocation: FMN has done the research for you and has given the allocation flowcharts to guide you.  I suggest following those, they have all outperformed the market historically.  These allocations tend to be more conservative and are a perfect fit for a bear market.
2. Stick to your allocation: If you don’t have a strategy than you need to develop one.  Again, I would follow the allocation flowcharts that can be found here on the website: http://www.wbtplan.com/allocation_flowchart.asp
3. Continue to invest regularly: Investing regularly is also known as dollar cost averaging.  It is a strategy that both ensures that you are purchasing shares when the market is cheap and your emotions tell you not to buy, and it helps to lower your average cost per share on the investments you do purchase.