Alison
By Allison Linn Senior writer
msnbc.com
updated 7/27/2007 5:34:42 PM ET 2007-07-27T21:34:42

Anyone who’s been following the stock market recently could be forgiven for having that feeling you get in the pit of your stomach when you board an especially dizzying roller coaster.

Major Market Indices

After all, investors have been taken on quite a wild ride in recent weeks, with shares first soaring, then falling, at what seems like an alarming rate.

After surging to close above a record 14,000 on July 19, the Dow Jones industrial average plunged more than 500 points over the final two sessions of the week amid fears about fallout from problems in the nation's housing market.

Investment experts warn that a period of major stock market volatility is no time to make rash decisions. But it can be a good time to evaluate whether you have been making the right investment decisions for your stage of life and long-term financial goals, they say.

“I’m telling people to panic — just kidding!” said Russ Kinnel, director of mutual fund research for Morningstar.

In reality, Kinnel said his first piece of advice would be to do the exact opposite of panicking —put things in perspective.

“It helps if you have the right mindset going in,” he said. “If you recognize your investments in equities as long-term investments, I think that helps you get through these times.”

That said, Kinnel said a topsy-turvy market can provide a good opportunity to decide whether you do have the right mix of investments to suit your needs, even if you don’t plan to cash in mutual funds or other investments for years to come.

For example, an investor who has an especially heavy concentration of holdings in small-cap stocks, real estate or low-rated junk bonds may realize, after this recent market fluctuation, that it’s time to rejigger that portfolio to a more diversified mix.

Good point to reassess
“If they’re nervous, it’s a good point at which to reassess: look at what they do own, and understand why they own it and for what period of time,” said John L. Claxton, a financial consultant and vice president of investments with RBC Dain Rauscher in Denver.

When doing that evaluation, Claxton urges investors not to think so much about what the market is doing day-to-day as about whether your asset mix is well-matched with where you are in life. A person who is five years from retiring, for example, will probably want to take fewer risks than someone who is many years away from needing to depend on investment income.

But Christine Fahlund, vice president and senior financial planner at T. Rowe Price in Baltimore, doesn't recommend making any of those changes while the market is still in flux. In fact, she would put off even evaluating your holdings for a couple of weeks.

"This is the time when you sit back and you let it happen," she said. "It’ll stabilize at some point relatively soon and then you can kind of take a look again at what you have and how your allocation was affected by this."

Claxton also urges investors to put the market fluctuations themselves in perspective. The past several years have been a time of unusually stable markets — and steady gains. In reality, he noted, major one-day market gains or drops aren’t that uncommon and generally work themselves out eventually.

“We got a little bit sleepy at the wheel,” he said. “We were enjoying the ride and forgot that the road can have bumps in it from time to time.”

Still, it’s not clear that the period of big swoops and gains is over. For some investors whose holdings are especially focused one sector, this period of uncertainty may still be a good time to tweak your portfolio, Kinnel said. Those with cash on the side also may see a good buying opportunity in the drop, Fahlund notes. But investment experts warn that you shouldn’t make any major moves if you are feeling particularly emotional about recent market activity.

“You can make a bad situation much worse by overreacting,” Kinnel said.

If you find yourself getting panicky, maybe a short break — or a good book — is in order until things calm down.

“The next thing to do is just tune out the markets and turn off the business news,” he said.

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