5 crisis questions answered

You've sent us an unprecedented number of questions about how to cope with this scary market. We've asked our top experts to help you out.

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Is it still possible to keep your cool in this market?
Is it still possible to keep your cool in this market?
Janice Revell, senior writer
Question: I've read your article "How to Keep Your Cool in a Dangerous Market" several times since it was published. I have a long-term strategy, but I'm less confident. Knowing what we now know, do you feel the same way? --Bill Ryan, Canandaigua, N.Y.

Answer: It really does seem that the world has changed completely in the few short months since we published that story on managing investment risk. Brand-name financial institutions have disappeared, the government has been forced to take unprecedented actions, and, of course, the stock market has plunged another 40%.

But there's a lot that hasn't changed, especially when it comes to your long-term investing strategy. The advice we gave in April for avoiding panic still holds true. Here's a quick recap:

As you've undoubtedly learned, the normal human reaction in a sell-off is to turn fearful and bail. But the risk of owning stocks is actually lower now than it was when prices were higher. Today the price/earnings ratios for companies in Standard & Poor's 500 index stands at 14, down sharply from the P/E of 23.6 when the bull market ended in October 2007.

Those cheap valuations are the main reason Warren Buffett recently announced that he's now loading up on stocks. Also, in scary markets you tend to underestimate the risk of being out of stocks. In the long run - and that's what you care about - the risk of missing the upside poses a graver threat to your wealth than taking hits on the downside does.

Next, focus on what you can control. This is a great time to rebalance your portfolio, since your asset allocation is likely off-kilter. And keep in mind that in the first 40 days of a new bull market, stocks typically regain a third of what they lost during the bear market, according to Standard & Poor's. Forget about sitting on the sidelines until you're confident that a bottom has been reached. Even Buffett admits he can't call a market bottom with any degree of accuracy.

Finally, if you find yourself moving your money around every time the market plunges a few hundred points (and there's no doubt we haven't seen the end of those days), it's time to consider hiring a financial planner. Sure, you'll pay a few more dollars. But it'll be small change compared with the cost of panicking.

NEXT: Is my 401(k) safe if my company goes bust?
Last updated November 13 2008: 5:30 PM ET
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