As the year winds down, I can’t help recalling a report on the Indian stock market I received early this year. It was dated Jan. 7, 2008. Had I or anybody else who read it acted on the report, we may have spared ourselves a lot of pain and losses. My own gut instinct is not too many did because the mood then was wholly upbeat and the worst fear investors had was being left out of the gravy train.

The report, “Continued boom or impending bust?” was released by Evalueserve, a research group run by a former IBM executive Alok Aggarwal from California and India. Briefly, it said there was a 50% chance that the Indian stock market would fall by 30% to 14,000 for the Sensex, which was near 21K at that time. The report laid out in numbers the impact on the stock market of inflow of foreign funds, and estimated the negative impact if and when money began to move out of the country. For every $12 billion that left the country, Aggarwal reckoned, the markets could fall by 30% but not even he figured out the greater implosion that was to occur.

Now we know that a little over $13 billion left the country’s stock markets this year but the fall was steeper because of the underlying reasons for the outflow – a factor Aggarwal’s report did not take into account. Of course, few anticipated the calamity that hit the world’s markets.

Around this time last year, the greatest fear was of being left out of a rising market; now, it is about being trapped in a falling market. The experts – from the fabled investor Warren Buffet down to his Indian counterpart Rakesh Jhunjhunwala – are not sure if the worst is behind us. Pray, what are we small investors to do?

I am no expert but let me give you a peek into what I am doing. I sure missed the opportunity to sell out and move into cash before the crash. But then my exposure to the stock market is about 5% of my assets. So, I didn't quite bother to sell out, though I clearly didn't expect a precipitous fall. Yes, there will be losses but I wouldn’t be wiped out.

Secondly, over the last few months, I have periodically sold small amounts of shares at recent highs on the expectation that the worst is far from over. It is a view that could easily be missed because the experts who say that have rarely been very emphatic for the simple reason that they have been wrong so many times in the recent past.

Thirdly, these sales will likely help me with my taxes. One can still wait till the last week of March to sell and book losses on all shares purchased over the last 12 months. Just like capital gains are taxed, capital losses can be offset against any capital gains this year, however unlikely that may be, or can be carried forward to offset against capital gains over the next eight years. I know this can be confusing to many. So, consult your tax professional before doing anything and remember to have complete details of when you bought and sold specific stocks. And remember, if you see value in some of the stocks you are selling, you can buy them back the next day and begin to rebuild your portfolio.

Happy investing, and let’s hope 2009 gets a lot better.