NEW YORK (CNN/Money) - I only just started contributing 5 percent of my income to my 401(k) this year. Since I have more than 40 years until I retire, I was advised that my investments should be moderate to high risk. So I put 80 percent of my contributions in high-risk stocks and the other 20 percent in international stocks -- in the second quarter I had a 19 percent loss. For now, I've decided to let it ride, but I can't help worrying whether my account balance is withering away to nothing. What should I do?

-- Melissa, Indianapolis, Indiana

I know exactly how you feel, and these days it's only natural to wonder whether you're doing nothing more than throwing money down a rat hole when you buy stocks. Which is why so many investors are fleeing stocks for the safe haven of bonds, CDs, money funds, real estate, cash under the mattress, you name it.

But guess what? That very dynamic is what makes stocks all the more attractive today. You see, during the 1990s boom lots of investors became convinced that stocks' gains were virtually guaranteed. So people bought without fear.

Coping with the bear       401(k): Stay the course Stocks: Why now is no time to sell 5 bear market lessons Best Funds 2002

And that attitude eventually makes stocks overvalued. The reason is that as people become convinced of the invincibility of stocks, so much money flows in and bids up prices so high, that it becomes impossible for stocks to continue to generate the gains people find so attractive.

And when something comes along to prick the bubble -- a recession, the realization by investors that there was no way most growth stocks could possibly generate enough earnings to warrant their bloated share prices -- we get a big BANG! And the market collapses, and investors begin to fear stocks again.

Which brings us back to where we are today. The fear is back, which is one reason why I like the long-term outlook for equities. You see, if you buy during periods when everyone is mad for stocks, the upside is rather limited because you're paying too much. But if you buy during periods when pessimism rules -- when "blood is running in the streets," to quote Baron Rothschild -- then stock prices have room to run, even though they may still fall farther in the short-term.

In short, when most people don't want to own stocks, you get paid for taking the risk of buying stocks. When everyone wants equities, you don't get paid for that risk. It's that simple.

So getting back to your situation, I would say that since you have a very long time horizon, you're doing absolutely the right thing to stay the course. What do you care if the market stays stagnant or goes down over the next three months, six months, even a year? You should be more concerned about where the market will be when you're getting ready to retire 40 years from now.

Consider this: If you had invested in a broadly diversified portfolio of large-company stocks in December 1972, you would have gotten in just in time to be decimated by the 1973-74 bear market, a 21-month slide that saw stock prices decline 48 percent, about the same damage we've suffered (so far) in this bear. But if you bought stocks then and held them to the beginning of this year -- a stretch of 29 years -- you would have earned a 12 percent annualized return. That's right, 12 percent after buying at a market top preceding one of the stock market's grizzliest bears.

If, on the other hand, you had bought "safe" Treasury bills, you wouldn't have suffered any losses during the 1973-74 bear. But if you had remained hunkered down in Treasuries until the beginning of this year, you would have earned an annualized 6.8 percent, only a bit more than half of what stocks gained.

But while I recommend the basic course of action you're taking, I would recommend a few changes. First, no matter how long my investing time horizon is, I wouldn't put all my money in stocks. Future returns are always uncertain, so I would hedge by putting at least a little bit -- say, 10 to 20 percent -- in bonds. If you want to be a bit more rigorous about divvying up your assets between stocks and bonds, you can check out a few of the asset allocation calculators available on the web, including our very own Asset Allocator.

Asset Allocation       Best Bond Funds Fund Screener Asset Allocator

Second, you say you have your money in "high-risk" stocks. I'm not sure what you consider high-risk, but, again, I think some hedging is in order. I would recommend that you diversify both your domestic and international stock holdings -- that is, some large-company stocks and small-caps, growth and value and a broad smattering of industries. This prevents you from taking a huge hit if those high-risk stocks turn out to be more high-risk than you ever imagined.

Finally, while I admire you for diversifying internationally, I'd caution that a 20 percent stake in international stocks is probably about as far as you want to go. As you may already know, adding foreign stocks to an all-US portfolio can dampen volatility. But once you get beyond 15 to 20 percent, the risk-reducing diversification benefit tends to tail off.

If you make the changes I've suggested, I think you'll be well positioned for a comfy retirement in 2042 or so. Of course, you can improve your chances for a cushy retirement even more by increasing your 401(k) contribution to more than 5 percent.

Walter Updegrave is the author of Investing for the Financially Challenged and can be seen regularly Monday mornings at 8:40 am on CNNfn.