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Protect What You Need, Risk What You Can

Stocks are scary, but their returns still can't be beat.

The Congressional Budget Office reported in October that 15 months of stock-market losses had bled $2 trillion from retirement savings. Then, before the month was over, the Dow Jones Industrial Average had two of its best days ever.

These are confusing times for investors. Even those now buying stocks are saying worse may lie ahead. Yet despite expectations of recession-driven losses, market pros are getting positioned for long-term gains. And you can, too. We spoke with a handful of experts to help you stop worrying and start creating your own economic recovery plan.

Fight Your Fear
In September, Warren Buffett, ranked by Forbes as the world’s wealthiest man, with $62 billion, began snapping up shares of U.S. companies. He wrote about the initiative in The New York Times: “A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful.”

Though new investments might start off sinking, you have to stay in to win. Stocks grow faster than bonds—eventually.

Your own long-term plan for growth should dictate how you invest, but if you recently dumped some or all of your stocks, start thinking about when to get back in. John Hussman, who runs the mutual funds that bear his name, and who spent most of a decade saying stocks were outrageously expensive, by late October saw the S&P 500—the market’s bellwether index of large U.S. companies—poised for annualized gains of 8 percent or more over the next decade. “Depression talk is hyperbole,” he says.

David Bach, author of the bestselling "Start Late, Finish Rich," agrees. “Stocks are trading at their lowest valuation in 30 years,” he says. That makes it a perfect time to make like Warren Buffett, and be greedy.

Get In—and Stay In
If you’ve gotten out of the market, “take 20 percent of your money and come up with a diversified portfolio,” says Bach. Broad-based index funds are a good, cheap way to invest, he says. “That way, you’re getting the whole market and not guessing what stocks to buy.”

When you feel conditions are right, venture another 20 percent. Though your investments might start off sinking, don’t lose courage. You have to stay in to win. Want proof? University of Michigan finance professor H. Nejat Seyhun analyzed stock-market movements between 1963 and 2004 and found that fewer than 1 percent of trading days accounted for 96 percent of earnings.


<p>Though new investments might start off sinking, you have to stay in to win.&nbsp; Stocks grow faster than bonds — eventually. <br> </p>

Rebalance and Replenish
Cheaper stocks mean big bargains: rebalancing your retirement accounts now will buy more shares per dollar. Say you want to maintain a portfolio that’s half stock and half bonds—but with recent stock declines yours is now 70 percent bonds. You may feel safer at the moment, but bonds’ average earnings—3.2 percent a year—can’t match stocks’ 7 percent return. Shifting some bond money into stock funds “lets you buy low and sell high,” says Sheryl Garrett, a certified financial planner in Shawnee Mission, Kansas. “You may not want to look at your 401(k) statement, but unless you have an all-in-one fund that adjusts the proportions of stocks and bonds for you, you really should rebalance.”

For the Short Term, Keep Cash
If you have tuition bills coming or are living off savings, some cash is a must. “Your own sense of caution should rule,” says Jonathan D. Pond, who regularly dispenses financial advice to AARP members at “You may want to have three years of living expenses in a safe vehicle like Treasury-backed money market accounts.”

And then there’s the flexibility cash gives you to get in on buying opportunities that are sure to arise in a down market. “You really do need to have some of your money in the stock market to have growth, and protection against inflation,” says Richard Hisey, president of AARP Financial. “That’s true if you’re 55, 65, or even 85.”

Wall Street’s rewards do come with risk. But what Winston Churchill said of democracy as a form of government could be said of investing in the stock market: It is the worst way—except for everything else.