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)

A good friend, Sherman Doll, who, like me, is a financial advisor, related the following story. He has been a two-line sport kite flier for several years. While not a pro, he has learned a few tricks by observing the flying behavior of these kites. He told me that one of the most difficult skills for beginners to master is what to do when their kite starts to plunge earthward. The natural, panicky impulse is to yank backward on the lines. However, this action only accelerates the kite's death spiral. The simple kite-saving technique is to calmly step forward and thrust your arms out. This causes the kite's downward acceleration to stop, allowing you to regain control of the kite and end its plunge. What does this have to do with investing?

On January 21, 2008, the global equity markets all collapsed. In just that one day, stock markets fell from about 5% to as much as 10%. 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 22^nd. This type of market move generally leads to panicked selling. And the media fuels the frenzy.

As I have learned to expect, I received two phone calls from the media 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 them the same answer—investors should do nothing except adhere to their well-thought-out investment plan, assuming they are knowledgeable enough to have 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.¹ 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 12 years ending in 1997, while the S&P 500 Index on a total return basis rose 734%, the average equity fund returned just 589%, but the average return for 186 TAA funds was a mere 384%, about half the return of the S&P 500 Index.²

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