Lynn O'Shaughnessy

Rather than adopt this long-term approach, too many investors become paralyzed about whether now is the time to liberate their money or pour more money into the market. You won't have to deal with this unnecessary anxiety, though, if you practice dollar cost averaging. This is what anybody with a 401(k) or 403(b) plan already does. Money is automatically taken out of your paycheck regardless of whether the financial stars are aligned. You can invest the same way with Individual Retirement Accounts or any other savings regimen by having the money automatically directed to these accounts either monthly or quarterly.

- Be diversified. This advice might sound obvious to all but a simpleton, but it's ignored by millions. A diversified portfolio helps keep your nest egg from splatting during rocky times. The Feb. 27 market mowed down a wide swath of victims, from blue chips and small stocks to foreign stocks and debt to junk and corporate bonds. But some investments remained unscathed.

In my own portfolio, the index funds that contain short-term bonds and inflation protection bonds jumped in value. And anybody who owns U.S. Treasuries did just fine as Pavlovian investors rushed to the safety of government debt.

A tragic mistake that so many people make is to judge whether an individual asset class is too volatile. Sure, if you look at an emerging market stock fund by its lonesome, for instance, it will look like the kind of investment only a bungee jumper would appreciate. Do you want your retirement to hinge on a mining company in the Amazon rain forest or a home builder in Malaysia? I sure wouldn't. But that's not the sort of question you should be asking.

The best way to fortify a portfolio is to collect yin and yang investments that react differently to different market conditions. Your goal should be to put together a portfolio that will provide you with the greatest rewards for the amount of risk you're willing to face. That means you should make sure that your portfolio is roomy enough for the overseas firecrackers, as well as those staid Treasuries. The next time the market tanks, you will be happy that you rearranged the furniture.

Lynn O'Shaughnessy

Lynn O'Shaughnessy is the author of Retirement Bible.

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