Wharton: Don't Play Games With Asset Allocation

For investors, 2008 has been a nightmare. The most widely followed market barometer, the Standard & Poor's 500, is down more than 16%, shrinking the holdings of millions of ordinary people who have put their faith into index-style investing.

Other major U.S. stock indexes have been hammered as well. And although many investors had bet on foreign stocks, hoping that international diversification would soften the ups and downs of their U.S. portfolios, most foreign stocks are down dramatically, too. And a recent rebound in the U.S. dollar, while it boosts Americans' buying power, has undermined their foreign holdings even further.

What are small investors to do in such a climate? Have the rules of the game changed in some fundamental way?

Stocks are still the best bet for long-term investors, offering better returns than bonds or cash, says Wharton finance professor Jeremy Siegel. But with all the turmoil in the financial services industry, he's not betting on quick gains in the S&P 500. "I don't think it will be up this year," he says, adding, however, that the market "is searching for a bottom. All we need is a few weeks of calm to return and I think we will have a very good base for a rally in the market."

Much of the damage to the S&P 500 can be traced to financial stocks. If one were to remove them from the list, then the ratio between share prices and corporate earnings would be a healthy 14 to one -- less than half the level reached during the stock bubble early in the decade. He calls those levels "really very reasonable."

TheStreet.com TV: Don't Panic -- Look for Buys

Frank Curzio, host of The Real Story podcast, says that until the housing market bottoms, don't bet on banks. Find other stocks to make some money.

To watch the video, click the player below:

"Nine of the 10 [S&P 500] sectors have higher earnings to date in 2008 than they had in 2007," Siegel says. Moreover, the international economic slowdown has caused prices of oil and many other commodities to fall, reducing the risk of serious inflation. "I really don't' think that's a concern anymore, and that's really important."