Stop Acting Like a Stock Market Scaredy Cat

Keeping cool when the heat is on is easier said than done, particularly for investors watching their portfolios get thrashed around like a rag doll in a tornado.

Hiding in the bathtub underneath a mattress won't help you weather the storm. Nor will pulling all of your money out of the stock market and reinforcing that mattress stuffing. However, if you insist on heading to the loo, here's a little historic reading material to pass the time: 

Dow Jones Average Returns, 1978-2008

That, friends, is a 30-year snapshot of the Dow. Note the general direction of the index over time. (Sometimes a picture's worth a thousand hours of nailbiting.)

What this chart shows is that despite the frenzied daily performance taking place every day on Wall Street, over time the stock market rewards plain old level-headedness (not emotional, short-term, knee-jerk trading).

With history as our guide, it's hard to deny that the key to coming out on the winning end of a market dip is patience.

Do you have the patience it takes?

Patience is relative and depends much on your life stage and the years until you need to dip into your long-term savings. For the most of us, long-term savings means money we've earmarked for retirement -- the balances in our 401(k)s, IRAs, or other retirement accounts.

As the stock market does its thing, keep in mind these general rules of thumb:

Young investors (20-plus-year time frame): Keep contributing the maximum to your work retirement plan (particularly if your employer offers a match) and IRA and stay concentrated in stocks. If you've got decades until retirement, be on the hunt for bargain stocks during stock market dips. It's like scoring 50% off the lowest-marked price at the mall.

Middle-aged investors (10- to 15-year time frame): Stocks are still where it's at for your retirement money. You're going to live well into your 80s (knock on wood), so don't sell your future short. These tend to be the peak earning years; keep socking away what you can in the stock market (no less than 70% of your portfolio) to maximixe your long-term savings. Money earmarked for near-term expenses -- college for the kids, helping your parents -- is a different story. At least three years before you need the cash (if not more, depending on your risk tolerance), shift it to safer havens such as bonds and CDs.

Near or in retirement: An adequate cash cushion is the retiree's lifeboat; it keeps you from having to sell stocks when they're low. Motley Fool retirement expert Robert Brokamp advises members to keep a minimum of five years' living expenses in cash. Resist moving your entire nest egg to safer ground or you risk shortchanging your future quality of life. Robert says that at least 40% of your portfolio should be left to grow in stocks. If your cash reserves currently are running low and you want to avoid selling investments before they've ripened, live smaller until your investments rebound or postpone retirement (or supplement your income through part-time work).

The long-term forecast: Wind, rain, sunshine, flying monkeys

Finally, if you need a little more convincing to keep from racing into the arms of bonds or cash, check out Wharton Business School professor Jeremy Siegel's Stocks for the Long Run (great bedtime or powder room reading!). Accompanied by extensive research, he reports that from 1871 to 2006, stocks outperformed bonds in 82% of 10-year periods, 96% of 20-year periods, and 100% of 30-year periods.

With my sincerest apologies to Dorothy, it's clear that for the long-term investor, there's no place like stocks.

Coincidentally, Dayana Yochim is a native Kansan. Despite living a good portion of her life land-locked, she earned her investing sea legs over at Fool.com where she's the consumer finance expert.