Post-Traumatic Distressed Syndrome

It's easy to understand why so many investors remain sidelined during one of the biggest bull market moves in Wall Street history.

From trough to peak, the S&P 500 gained 62% from March 9 until October 19, when the S&P 500 flirted with 1100. It was an entirely unexpected run, with individual investors exiting their mutual funds the entire time the market was running up from the lows.

It's also quite easy to understand why the bears remained steadfastly bearish. No one of us had ever seen a crash like this. Policymakers did not instill confidence as they lurched from indifference to inaction to incompetence to going "all in" ... all within a matter of months.

In the financial crisis that preceded this rally, the following firms failed, were nationalized or acquired at the "request" of the government:

*Bear Stearns *Fannie Mae *Freddie Mac *Lehman Brothers *Merrill Lynch *AIG *Wachovia *Washington Mutual

The largest and, presumably, most stable banks in the U.S. received hundreds of billions of dollars of emergency aid, while money-market mutual funds "broke the buck," commercial paper issuance collapsed and markets ceased to function normally, bringing the entire financial system, both here and abroad, to a virtual standstill and near collapse.

Few people, if any, experienced such a calamity and, even fewer still have spent a lot of time studying the few historically analogous events that dot the financial landscape.

Let's give the bears and the fence-sitters a break. Let's assume they are shell-shocked and can't recognize distressed assets as a viable investment alternative.

After fighting through the natural emotions of extreme fear and partial paralysis that gripped me from September of 2008 through February 2009, I used my studies of market history to make a calculated bet that an important bottom was forming and that buying distressed assets was a viable option.

My reasoning was simple ... if the strategy failed, then money was about to become the last thing we were worried about, as social decay and anarchy were the likely outcomes of a complete financial collapse.

Once the Fed went "all in," I went with them.

But not everyone should be assumed to have spent time preparing for such an eventuality. Many people who experienced "The Great Depression" never invested a dime for the rest of their lives, nor did they take on debt.

So it is understandable why both professionals and amateurs alike fought the Fed and fought the Tape.

But a new battle is brewing for the hearts and minds of investors. One the one, hand we have those who have ceaselessly predicted the end of the world and, on the other hand, we have those who see a world without end, Amen.

They are polar extremes and make assumptions for which there is no historical justification. The world didn't and won't end anytime soon, financial or otherwise. Nor will investing for the "long run" make you a fortune unless you are the best stock picker in the world, who can remain long all the winners while shunning all the losers over the course of several decades.

As the market transitions from the explosive stage of a brand new bull market, borne of stresses and distress, it's not a bad idea to lock in profits where large gains have been made.

It's also not a bad idea to pick through the rubble of distress that has yet to fully recover from a historic market meltdown. And yes, after a historic rally, there are many equity investments that fit into each category.

It's also okay to take time to clear your head and prepare for 2010, which, no doubt, will be vastly different than 2009.

We are approaching the time of year when it makes sense to book profits, re-load the gun and take aim at the next class of assets that can provide superior returns.

Now that the crisis has passed, that can be done more rationally and with less post-traumatic distress disorder than in months just past.

Use this time wisely. Play with house money if you have gains. Begin deploying capital to underappreciated areas if you haven't yet profited from the chaos that occurred in the last 13 months.

But most of all, give yourself a break from the blame of being underinvested, or having "missed the move."

There's time left on the clock. Re-start it. Get a plan and get back in the game.

Regards,

Ron Insana

Send email to ron.insana@thestreet.com