As a year of tanking balance sheetsand massive layoffs came to an end, investors either fled the market altogether or ran for cover in the safety of Treasuries. Even other fixed-income securities, such as muni and high-yield bonds, performed weakly.

"In a time of recession, people usually shift out of equities and into bonds, and that's exactly what they were doing in 2007 and in the first two quarters of 2008," says Vince Deluard, global equity strategist at Trim Tabs. "But that totally reversed in September through the end of the year. Forty billion left bonds—the highest outflow from bonds ever."

Dollars were, however, flowing into Treasuries, and with amazing results. The Wasatch-Hoisington U.S. Treasury fund gained 31.5% in the fourth quarter alone and 37.8% for the year.

But not all assets were exiting equities. Some began moving into ETFs—perhaps to harvest tax losses, perhaps to take advantage of ETFs' noted flexibility. "You can do anything with an ETF," Deluard notes: "go short, choose leverage, get commodity exposure."

Real Estate Woes

Amidst widespread negative returns, real estate funds—which managed to hold up most of the year—took a hard hit in the fourth quarter, thanks to plunging property values and the tightening of credit. In fact, 40% of the 10 worst-performing equity funds were in the real estate sector.

"Real estate finally collapsed, since real estate investment trusts (REITs) and other real estate companies buy real estate by borrowing money," says John Coumarianos, a fund analyst at Morningstar. "If you had debt on your balance sheet, you got slammed at the end of last year due to the credit crisis. Some REITs were going to have trouble paying their dividends, so they had to sell property, which is very difficult right now."

Bigger Was Slightly Better

As investors fled to quality, large-cap funds slightly outperformed mid- and small-caps, although each remained deeply in the red. The iShares Morningstar Large Core Index, for example, was down 19% in the fourth quarter, while its small core counterpart lost 28%.

The high liquidity and low debt of large companies served them well in this rocky environment. "If you can say there is a differentiator in the market, it's the companies that have good balance sheets, can finance their own operations and don't need excessive access to the capital markets," Coumarianos notes. Companies with such a competitive advantage, such as Colgate and Proctor & Gamble, performed relatively well last year, losing only 10% and 14%, respectively.

Global Selloff

Just as fear drove people into Treasuries, so, too, did it drive them out of global markets. Investors sold their international equity holdings three times faster than domestic ones last year. Foreign investments—particularly emerging markets—underperformed the dismal returns in the United States. India dropped about 50% for the year through Dec. 26; Shanghai was down 54% and Japan lost 43%.

But just as everything seemed to be the bleakest, assets began trickling back into mutual funds at the end of last year. As of Jan. 7, 2009, mutual funds had taken in $11 billion since Dec. 1, a small, hopeful sign that at least some investors believe the market has finally hit bottom.