Investors suffered through the market's most nerve-wracking year since the Great Depression. Thanks to 401(k) and IRA accounts, the pain was widespread. Nearly 50 percent of U.S. households own either stocks or bonds, according to a study released this month by the Investment Company Institute and the Securities Industry and Financial Markets Association.

Geoffrey Gerber, president of Twin Capital Management in McMurray, believes that although investors will still have a lot to worry about in 2009, they should see some improvement.

Q. Of all the things that happened this year in the market, what took you most by surprise: How the housing problem spilled over into the economy at large? How quickly big Wall Street firms disintegrated? Something else?

A. The fact that big Wall Street firms such as 85-year-old Bear Stearns and over 100-year-old Lehman Brothers could fall so quickly was a tremendous surprise. Part of the speed of Bear Stearns' decline was an unprecedented run on the bank, due to a lack of confidence.

Of course the housing problem spilled over into the economy at large, and clearly the problems of these large Wall Street firms were instigated by the subprime market. The inevitable problem was that banks were overly levered in risky assets, which resulted in a credit crunch for the broader economy.

In September it became quite clear to everyone that Wall Street and "Main Street" are much more linked in terms of their fate than many people on Main Street believed.

Another big surprise has been the market's reaction to these unforeseen catastrophic events in terms of unprecedented market volatility. Looking back at the 20 best days and 20 worst days in terms of daily percentage gain or loss on the NYSE Index for the past 43 years, we find the most extreme days for the market being the most recent ones.

From Sept. 15th (the day Lehman announced bankruptcy) through early December, the NYSE has experienced 12 out of its 20 worst days and 10 out of its 20 best days. Even more extreme, five of the seven best days for the NYSE since January 1966 have occurred since mid-September while four of the six worst days have also occurred recently.

Q. Given all the bleak news served up in 2008, is there more bad news waiting for us in 2009 or do we pretty much know the extent of the problems and what damage they will cause?

A. While I would like to say that there is no more bad news waiting for us, unfortunately that is difficult to conclude. Even though some hedge funds started feeling the painful repercussions of the subprime market in August 2007, few people predicted what would happen in 2008. Even when JPMorgan bailed out Bear in March 2008, few envisioned the possibility of Lehman falling or AIG needing a government bailout to survive.

Even barring another major "bad news" event in 2009, it is difficult to assess the full extent of the problems we are currently facing and the ongoing damage they will cause. The trickle-down effect in our global economy may take awhile to filter through the tough economic environment.

Q. How has the stock market's decline this year affected how investors -- whether you're talking about pension fund managers or blue-collar workers with 401(k) plans -- perceive the stock market and the concept of "buy and hold"?

A. When there is extreme volatility in the market, it becomes difficult for investors and investment managers to make and implement investment decisions. The idea of "buy and hold" makes a lot of sense as long as you can ride out the drop in valuations.

When the S&P 500 can deliver a return in the last hour of one trading day that would normally represent a reasonable return for an entire year, investors are crippled with fear of making a wrong decision or missing a major rebound.

Q. To the extent that 2008 shook investor faith in Wall Street, what must be done to restore it and how long will it take?

A. As it now stands, 2008 is the worst year for the S&P 500 since 1931. Following the market crash in 1929 and early 1930s, the government began to place regulations, forming the SEC in the Securities Act of 1933. Still, it took decades for investors to resume comfort and invest with confidence in the stock market.

In the current decade (which will likely be the worst for the U.S. stock market since the 1930s), these mechanisms and regulations are in place and nevertheless, stock prices are still extremely volatile.

That said, I do not think it will take decades to get back to more reasonable price movements and for investors to feel comfortable investing in the stock market. The market in the 1920s and 1930s was driven by individual investors as compared to markets today, which are much more affected by institutional investors who tend to focus on longer-term returns.

Q. Which will do better next year, stocks or bonds? Why?

A. It depends on the type of bonds you are talking about.

I would expect stocks to outperform government bonds in 2009. The differential between the return on the Barclay's (formerly Lehman) Aggregate Government Bond Index and the S&P 500 for the 12 months ending November 2008 was close to 50 percent, the highest 12-month differential in over 30 years. With interest rates on government bonds so low, I believe stocks will provide a higher return in 2009.

Other types of bonds such as investment grade corporate and municipal bonds will do well in 2009 as credit spreads start to decline.

Q. A lot of market pundits think we're in for a prolonged period of time where the stock market moves sideways, trading in a narrow range. Do you buy that?

A. It is hard for me to think that we will be in a narrow trading range for a prolonged period of time when the last 15 minutes of the day can produce a positive or negative return that would be reasonable to expect over a full year.

If the economy continues to suffer in 2009, then I think we could test new lows. If, on the other hand, the economy rebounds in the latter half of 2009, then the market could significantly rebound off the November 2008 lows.

Q. Any ideas on how long it takes the Dow Jones Industrial Average to get back to 13,000, basically where it was a year ago?

A. The year started with the Dow at 13,265. At the low of 7,552 on Nov. 20, the Dow lost 43 percent. Unfortunately the mathematics of compounding requires the market to go up 75 percent to make up for that 43 percent decline.

Since Nov. 20, the Dow has rebounded about 1,000 points or 13 percent. To make it back to 13,265, we still need almost a 60 percent return. Given that the Dow produces a 10 percent annual return on average, it could take five years to get back to that level ... or less.

Q. Given the monumental task President-elect Barack Obama and the new Congress face in rebuilding the economy, will they find time to address some of the abuses that became so evident on Wall Street this year?

A. In his campaign, President-elect Barack Obama spoke about health-care reform, energy independence and "change." Given the environment he and the new Congress are inheriting, his focus will clearly be on the economy.

Even with some government and industry imposed regulations on Wall Street, financiers found loopholes and ways to overly lever their companies, making risky investments whose assets were tied to subprime mortgages. The fall of Wall Street and its subsequent unraveling of the financial system throughout the broader economy led to a full-scale crisis. Adding further fuel to the fire, the recent Madoff hedge fund scandal raises additional questions about how successful regulatory oversight can be.

A full recovery will require both economic stimulus and a rebuilding of investors' confidence in the stock market and in the various investment vehicles offered by Wall Street. To restore investor confidence, some financial market regulatory changes may be in order.