How to Ride Out This Storm

Two weeks of market upheaval and political tension have left many investors confused. Here are answers to pressing questions about the current financial turmoil.

Q So what should I be doing now?

A bear market is always a good time to take a hard look at your portfolio and gauge how much risk you can stand. From their peak last Oct. 9, U.S. stocks, as measured by the Standard & Poor's 500-stock index, have dropped by more than 20 percent. (Many individual stocks have, of course, dropped far more.) If a decline of that magnitude doesn't faze you, stick with your plan. If it leaves you queasy, you probably need to trim your allotment to stocks and add to your bond and cash holdings.

I invest regularly in my employer's 401(k) plan and put the bulk of my money into stock funds. Should I stick with the program?

Absolutely. If you stop investing in your retirement plan or you terminate any kind of a dollar-cost-averaging program, you're defeating one of the major purposes of systematic investing: It forces you to keep buying stocks when their prices are falling and they're on sale. That's something you probably wouldn't do if you were left to your own devices. If you're worried about the investments in your 401(k) plan, it's better to tinker with the breakdown among stocks, bonds and cash rather than to stop your regular investment program.

Are stocks still the best investment for the long haul?

Yes. But don't bet on stocks earning the historical return of 10 percent annualized over the next 10 years. The economy and, hence, corporate earnings will grow at a below-average rate as the United States -- individuals, businesses and the government -- unwinds from its debt binge. On the plus side, stocks aren't terribly expensive -- nor should they be, coming off a 10-year period during which the Standard & Poor's 500-stock index returned only 3 percent annualized. In fact, from March 24, 2000, when the technology-driven bull market peaked, to this Sept. 25, the index lost an annualized 1 percent. Stocks are due for a period of decent, if not scintillating, performance.

What's the best I can do if I can't handle any risk?

The typical taxable money-market fund yields about 2.2 percent. That's nothing to write home about, especially if the money is in a taxable account. But some bank money-market accounts are yielding more than 3.5 percent (see http://www.bankrate.com for top yielders). And because of upheaval in the market for short-term municipal IOUs, tax-free money-market funds are delivering extraordinary returns. The average tax-free money fund yielded 4.19 percent as of Sept. 25, according to Crane Data. As of Sept. 26, Fidelity Municipal Money Market Fund (FTEXX) sported an effective seven-day yield of 5.33 percent.