This is a recent post by Professors Eugene Fama and Ken French. It responds to an issue that many of us have dealt with. Someone we know says that they got out of the market early last year, or their advisor put all their money in cash just before the market crashed in September. I am generally sceptical of such claims. Just like to people who claimed they made a fortune in Internet stocks in 1999 and then got out just in time.
Clearly, there are some who got the timing right over the past year. However, there are probably a lot more who got it wrong. Markets are very unpredictable and we think trying to predict them will likely cause more harm than good. We don't want to rely on luck to determine the success of our long-term investment plans. We believe it is better to have a well thought out plan that relies on proper asset allocation and diversification and that keeps investment costs to a minimum. The hard part is to stick to the plan when so may other are panicking.