Lynn Carpenter says the lessons from history show that doing nothing or selling everything are the worst things an investor can do in times like these. The brave — and ultimately the winners — will be putting new money in the market right now…

This from Investor’s Daily Edge:

It’s everywhere. Gloom. Giving up. Getting out. Selling into any rally.

The advocates of buying low have gone into hiding. One investment website announces, “The rally won’t hold.” Another warns not to be fooled by the rally on Monday. Still another says stocks are in a swoon, and a famous money manager warns not to start buying too soon. A big blog tells thousands to sell into the rally.

This is the most uniformly negative outlook I’ve ever seen. It was not this bad in 2000 after the dot-com crash. Nor in 2001 or 2002 when the bear market continued to pull down stocks. It wasn’t this bad after 9/11. Nor in 1987. But this time, the usual stories on how markets bounce back after big drops are missing. The gloom is everywhere.

Yee-hah! Pass the ammo!

OK, it’s scary. And it’s likely that there are some stocks in your portfolio that you would be wise to sell now. That will be true for most of us because there is a slight twist in this bear market. It comes alongside recession and credit fears. That means that many companies that were on an upward track just a few months ago are finding the future suddenly looks dimmer than they anticipated. So it’s a good time to check the earnings expectations and business outlook for all your companies, as well as profit margins, etc. I am pretty certain you’ll find a stock or two that doesn’t look as wise as it did a few weeks ago.

That normal housekeeping aside, though, this is one special time. If you have some long-term goals… in particular, children’s trust funds, retirement… set up accounts and get them going. Now.

People are scared, and it’s been worse than usual this time because there are fewer ideas we can lean up against and absolutely expect they will hold up. The fact that a stock is a blue chip is apt to be scant solace to us these days. Suddenly, we live in a world that might not have a GM anymore. We’re in a world that has already seen Wachovia Bank go under. How many retailers are going to fail? Hard to say.

This adds to the width of gloom, as well as the depth of despair. Two surveys speak to us: the American Association of Individual Investors shows 54% of investors are now bearish. The Investors Intelligence Sentiment survey shows 53% of investment writers are bearish. These are extreme readings. Another portion of investors are unsure which way they think the market is going. But once you get around 55% bears in either survey, the market tends to bottom.

Now… given all the gloom and all the uncertainty about who the survivors will be, why should you choose to put new money in the market?

I could give you a couple of well-worn sayings: “buy low, sell high,” or “be brave when others are fearful.” The reason this simple advice sticks around is because it’s right… but it is also exceedingly hard to follow. It means putting money into markets like this one… even if it might continue down…

Well, let me give you a little encouragement. History has a lesson for you.

- If you started with $10 in the market in 1929 and added $10 a year until 1938, you would have ended with $184 in your account—an 84% gain, even though some funds had little time to work. These numbers assume the money waiting to be invested was held in T-bills, just as you would probably do today.

- If you had merely left your account alone after the Great Crash, you would have still shown a loss 10 years later of close to 60%.

- If you left your money in, but reinvested dividends, you would have ended the decade with a 5% gain… even without adding any new money.

- And if you had pulled out of the market completely in the week of the Great Crash, you would have permanently lost 48% from the market’s peak.

This is what happens for active investors in the worst of times.

Gives you reason to love a bear, doesn’t it?

If you use this market to set up a new trust fund or account, choose carefully, diversify your portfolio with at least eight stocks but no more than 30, buy more regularly, and reinvest all dividends. Do all that, and your new 2008-Crash account is likely to send your kid to Harvard with money left over for law school. Easily.

And, by the way, the 1930s were another period of banking failures and faltering blue chip companies that were going under. Let that be your inspiration.

Source: Can You Really Dare to Buy Low?… Most Can’t, Everyone Should