This post is part of a series where personal finance expert Dan Solin looks at money moves that may seem smart in tough economic times, but are actually quite dumb. See all 12.

Almost everyone has taken a big hit in this bear market. Many investors are tempted to take more risk with their portfolios to make up for their losses.

This is a bad idea.

Your asset allocation, the division of your portfolio between stocks and bonds, accounts for as much as 100% of the level of your returns, according to one prominent study.

Your asset allocation is determined by your ability to withstand market volatility. In large part, it is determined by the amount of time you can keep your assets invested without withdrawing a substantial portion (20% or more) of them.

The fact that you may have lost money in the current markets does not mean that you are able to take more risk. In fact, it may mean the opposite: Your ability to withstand market losses has diminished.

Remember that "risk" means "volatility." When you take on more risk, you are increasing volatility. Volatility is a two way street. It moves both up and down.

This is part of a series of columns by retirement expert Dan Solin. Please bring him your questions in the comments box and he will answer as many as he can.

Is this a good time to invest, or should you sit on the sidelines until the market has "bottomed out"? This is the most common question I am asked.

It would be great if there was a way to tell when the market had reached its low. If you could do this, you would be able to buy stocks when the markets were taking off and retreat to risk-free investments, like cash and Treasury bills, in down markets.

Unfortunately, the data on timing the markets is very dismal.

One large study looked at more than 15,000 predictions by 237 market timing newsletters over a 12-year period. At the end of the period studied, 94.5% of the newsletters went bust. Not very impressive.

The financial media likes to hype stories suggesting that the markets are tanking or are poised for a rebound. These predictions are usually inaccurate and generally unreliable.

Here's a better question for you to consider: Should you be in the markets at all?

If you're like most people, you probably have a larger percentage of your investment money in cash than you had two years ago. While some investors are taking their chances in this recent market volatility, many are choosing to wait on the sidelines until the "All Clear!" call comes in (whenever and however that's really communicated -- but that's another blog post).

Well, these investors sitting on cash are not alone. Bloomberg reports this morning that mutual funds have been desperately selling stocks and moving to pretty sizable cash hordes. In a survey conducted by Merrill Lynch and reported by Bloomberg, managers have been feverishly adding to their cash positions and consequently, "cash relative to total assets also rose to a five-year high as managers found fewer stocks to purchase and anticipated redemptions."

This brings up a couple of issues. Let's be clear: mutual fund managers want to manage volatility like all investors. The problem here is that if I hand my money over to a small cap manager because I believe he's pretty proficient in picking stocks, I don't really want him moving into cash. That's my job as portfolio manager of my own investment account. I'm essentially paying him to be in the market -- not move out of it.

Our stay-put behavior reflects our view that the stock market serves as a relocation center at which money is moved from the active to the patient.
--Warren Buffett

Here's an interesting blog post on SeekingAlpha written by Larry Swedroe. Swedroe, Director of Research of BAM Advisor Services, focuses on results stemming from the last 11 recessions. Returns during these periods averaged out to 7%, a full 2% more than what Treasuries averaged during the same periods.

This means, even if investors could perfectly time selling their portfolios of stock at the market high, they still would have made out worse than holding through the recessionary periods.

Unfortunately, even most professional investors can't forsee market tops. What ends up occurring during tumultuous times like these is that investors overtrade and the market truly becomes Buffett's "relocation center from the active to the patient."

Under the category of "the stock market did not need this additional headwind," some of the largest public pension funds have been selling shares in a big way, The Wall Street Journal reported Tuesday.

The Journal said the New York State Teachers' Retirement System, the New York State Common Retirement Fund, the Teacher Retirement System of Texas and the Florida Retirement System Pension Plan are all funds that are reducing stakes in U.S. companies. Collectively, these funds control more than $500 billion in assets.

Further, and equally significant, the nation's largest fund, the $250-billion California Public Employees' Retirement System (Calpers) is considering shedding its home-country bias, the Sacramento Bee reported.

One plan calls for Calpers to reduce U.S. equities exposure to 28.4% from 40% and increase international equities exposure to 28.4% from 20%. The Calpers Board of Directors is expected to vote on the measure next month.

Now that the Dow has fallen 10% from its October 2007 peak of 14,164 to 12,743 -- i.e. now that it officially qualifies as a correction, it's a good time to summarize the investment landscape, fundamental and technically.

Although numerous fundamentals (high energy prices, subprime mortgage defaults and subprime-asset losses, housing sector slump, slowing U.S. consumer spending) suggest U.S. economic growth will slow up ahead, and hence that more selling is ahead for the Dow, that, in fact, may not be the case.

If limited to roughly 10%, the Dow's decline constitutes solely a correction. Keep in mind also that the Dow is a lead indicator that always points to economic conditions 6-9 months ahead. Hence, investors, if they believe that measures being taken are addressing important concerns, could conclude that economic conditions will improve and hence send the Dow rising very soon.

"The world's richest university just got richer," says Nick Vardy, noting that Harvard saw its endowment grow 23% to $34.9 billion in the 12 months that ended June 30.

The editor of The Global Stock Investor explains, "This growth represents some of the strongest in Harvard's history and is its best investment performance since 2000, when the endowment swelled by an astonishing 32.2%."

Harvard's gain this year, he contends, far outstripped the average fiscal 2007 performance of 17.7% turned in by 151 large institutional (non-university) funds tracked by the Trust Universe Comparison Service -- as well as the 20.6% gain of the S&P 500 over the same period.

Put another way, Vardy says, "The $5.7 billion gain in Harvard's endowment last year exceeded the total endowment of all of Oxford's 36 colleges -- accumulated since teaching began in Oxford in 1096."

Despite the big run in domestic equity prices for 2007, investors are still conservative.

In a note sent to clients yesterday, Tom McManus, chief investment strategist of Bank of America, points out that investment in open-end mutual funds increased a measly +$1.2B, slightly better than the +$1.0B figure for the prior week. Total growth in equity fund assets was just 1.9% year over year. This is hardly a sign of stock market euphoria.

While in taxable bond funds, growth was 9.9%, with total corporate bond investment jumping 12.2% and investment grade bond investment jumping 18.1%.

As the baby boomers get older, it should be expected that investors will allocate more of their assets into more conservative instruments. However, this is very conservative and a sign this bull market has a long way to go.

Stay with stocks and avoid bonds is still the investment theme until there is a serious sentiment change in favor of stocks.

Based on an analysis of quarterly sector performance during the period 1995-2006, S&P 500 economic sectors that perform best in any given quarter tend to fare less well in the three months that follow. In contrast, groups that perform worst tend to improve their relative standing in the subsequent span.

So far this period, utilities and materials have been the best performers by a relatively wide margin. The laggards have been financials and consumer discretionary shares. If past trends hold true, it might make sense to shift sector allocations for the next three months away from shares in the winning sectors towards those in groups that finished at the bottom of the pack.

It's worth noting that this is a relative performance strategy. Some or all of the ten sectors could finish higher or lower next quarter, depending on what happens to the overall market.

Sector	Quarter-to-Date Return %
=================	====
Utilities	8.78
Materials	7.92
Telecom Services	4.80
Energy	2.07
Consumer Staples	0.99
Industrials	0.44
Health Care	0.24
=================	====
S&P 500	-0.08
=================	====
Information Technology	-1.02
Consumer Discretionary	-1.33
Financials	-3.86

Michael Panzner is a 25-year veteran of the global stock, bond, and currency markets and the author of Financial Armageddon: Protecting Your Future from Four Impending Catastrophes and The New Laws of the Stock Market Jungle: An Insider's Guide to Successful Investing in a Changing World.