In May 1997 money magazine published a one page article titled Learn from the big bad bear: Four moves that can help you survive the next stock crash.Here was the advice (it didnt help, and investors now know it doesnt work after the recent decline):Rein in risk Dont buy aggressive growth funds unless youre willing endure a loss while waiting for a rebound. (The article suggested buying less aggressive growth funds since they lost less in 1973-74, but in 1997 to 1999 the money to be made was in aggressively getting behind momentum stocks; less aggressive growth funds arent a solution, those funds also declined severely in 2008)Spread your bets a balanced portfolio with cash, bonds, and foreign shares (this approach failed as of December 2008 markets are interrelated, the article didnt consider that).Dont panic By selling into a bear market, you turn your paper losses into real ones panic sellers miss out on the earliest, biggest gains once stocks rise from the dead. The article ends with: So dont try to time the market. Just hang on tight, and ride out the bear until it finally turns back into a bull.This is unhelpful guidance. Dont panic isnt advice; its foolishness. The best way to protect your investment holdings is to sell them as they decline to the break-even point/price you paid. Thats an automatic safety net approach. And if you have to wait for stocks to turn around for sixteen years, for example, to begin to get your money back you didnt do well. In the December 6th 2008 issue of The Economist, pg. 13, is an article titled Where have all your savings gone? that states: Any American who diligently put $100 a month into a domestic equity mutual fund for the past ten years will find his pot worth less than he put into it; a European who did the same has lost a quarter of his money They should, of course, have got out in 2000, when the global price to earnings ratio was 35; shares look relatively much more attractive now, since the ratio is down to ten. A recent price-earnings analysis shows that, when American price-earnings ratios are low, returns on equities over the next decade average 8%; when they are high, returns average 3%.Three to eight percent returns arent going to absorb the full losses for some time (assuming share prices dont significantly decline further, which happened in 1974 after the severe decline of 1973), and its certainly not going to make the average investor wealthy. Selling is more important than buying, unrealized gains arent as beneficial as realized gains in a tax-free or tax deferred retirement account. Everybody can tell you when to buy stocks, Money magazine does it all the time, but it doesnt make anyone rich that comes from knowing when to sell your holdings. And if owning stocks at the bottom is the best time to buy as the article suggested, then common sense tells you that when prices are going down it is not a favorable time to hold, theres no advantage. The advantage comes from having sold your investments early and to be able to act to buy when prices are extremely low and due for a rebound. For those people that hold on, they probably wont have the money or the mental ability to deal with the stress to buy again, even at depressed price levels. When you win and cash out, its easier to take another chance on buying stocks because youre playing with house money your profit, not your original capital.
http://www.metacafe.com/watch/2284863/bear_market_unhelpful_articles_money_magazine_1996_1997/