Never have we heard such dour predictions for the economy and the markets. With comparisons to the Great Depression splashed across TV screens and newspaper headlines every day, investors who've seen their life savings disappear at an alarming rate feel constant pressure to throw in the towel.

Increasingly, people are succumbing to the pressure to sell -- even if it means giving up on ever being able to retire. The latest figures from one study paint a disturbing picture of the average investor's response to the bear market.

Capitulation
According to Hewitt Associates, employees moved a record $6.3 billion in their 401(k) accounts from stocks and stock mutual funds to other types of assets. That was more than twice the previous high set in 2002, the final year of the last bear market.

The exodus from stocks included all types of funds. International stock funds saw the biggest declines, but investors also pulled out of U.S. stock funds and target asset allocation funds. Even balanced funds, with a fairly high allocation to bonds and other assets, had outflows of $1 billion.

Where did all this money go? Predominantly, investors chose stable-value funds -- cash substitutes that pay higher rates than traditional money market mutual funds. $5.3 billion went into stable-value choices, while bond funds took in $1.2 billion.

A bad track record
So in light of a market that has continued to slide in the opening days of 2009, did these investors make a smart move? Unfortunately, history suggests not.

For an idea of their previous track record, let's look back to the last big outflow year, 2002. Hundreds of stocks lost over half their value during the 2000-02 bear market, and investors who gave up on stocks near the end of 2002 probably believed the worst was yet to come.

Yet selling at the end of 2002 proved to be just about the worst move you could make. Consider some examples of beaten-down stocks and how they performed during the following years:

Stock

Total Return, 2000-02

Total Return, 2003-07

Amazon.com (NASDAQ:AMZN)

(75.2%)

390.4%

US Steel (NYSE:X)

(56.1%)

864.4%

Halliburton (NYSE:HAL)

(50.8%)

333%

Apple (NASDAQ:AAPL)

(72.1%)

2,664.6%

Hewlett-Packard (NYSE:HPQ)

(68.2%)

209.2%

McDonald's (NYSE:MCD)

(58.9%)

306.6%

SanDisk (NASDAQ:SNDK)

(57.8%)

226.8%

Source: Capital IQ, a division of Standard and Poor's.

Meanwhile, those who stayed in cash saw their income get decimated. An ambitious Federal Reserve cut interest rates 13 times from 2001 to mid-2003 and kept its Fed funds rate below 2% for much of 2003 and 2004, keeping the rates savers received low.

What to do
Most people simply can't save enough to retire comfortably with low-risk investments. As hard as it is in times like these, you have to think long-term with your investing.

So if you've made it this long without panic-selling, now's not the time to lose your cool. Take a step back and consider your financial needs as well as your resources:

  • Do you need cash now? If you decided to delay selling stocks last year in hopes that the bear market would end sooner than later, you might be running low on cash by now. Having lost that bet, you may simply have to sell part of your portfolio to get your cash cushion healthy again.
  • Are you out of balance? On the other hand, if you have plenty of time before you need your money, you may actually find that the severe drop in stock prices has left your portfolio with a below-target allocation in stocks. To fix the problem, you may want to redirect future savings into stocks rather than your usual mix.
  • Can you sleep at night? 2008 was a nasty lesson on how much risk stock investors take on. If that proved more than you're up for, then develop a new asset allocation strategy that more accurately fits your appetite for risk. Don't give up entirely -- but get the breathing room you need to get yourself through the bear.

As tempting as it may be to sell your shares and wipe your hands of the stock market once and for all, dumping stocks at firesale prices has historically been the worst move you could make. Instead of doing something you'll regret, get rid of your emotion and look calmly at how you can make your portfolio stronger and safer.

More on investing for a better retirement:

Learn more about how to save and invest for retirement with our Rule Your Retirement newsletter. Each month, you'll get useful advice on how to handle tough markets and where you invest your money. See how Rule Your Retirement can help you with a free 30-day trial today.

Fool contributor Dan Caplinger still holds out hope of retiring someday. He doesn't own shares of the companies mentioned in this article. Amazon.com and Apple are Motley Fool Stock Advisor selections. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy never quits.