Don't panic when market bounces around

Once again, the market is showing us its rollercoaster ride of volatility.

As we remember the 1990s, it's extremely hard to not get antsy as we look at our investment portfolio numbers.

It is human nature for people's confidence to grow shaky and increasingly averse to risk when their money appears to be evaporating.

Reacting to a down market by pulling out all of your money or constantly changing your allocations will likely do more harm in the long run. This can lead to a crippling effect due to the costs of frequent trading. Worse, you'll be potentially missing out on the subsequent market rebound.

Don't panic

Anxiety is increasingly evident as the ease of getting in and out of investments has risen with technology. A worried investor is often just a mouse click away from a change in his or her portfolio.

According to Bogle Financial Markets Research Center, the average stock fund holding period has dropped from 5.8 years to 4.2 years during the past 30 years.

Thanks to the narrow focus of many mutual funds and exchange traded funds (ETFs), many fund investors are starting to behave like sector traders -- chasing returns in one area.

Look back at what happened to the investors chasing technology stocks when dot-com went dot-bomb.

Do diversify

If you haven't already, now's the time to diversify. Better returns continue to be made by investors who stay the course and spread their money out.

The 21st century has been the poster child for diversification. Each major class of investments outpaced the S&P 500 (Large Cap Stock Index).

The following examples demonstrate how spreading out your investments can be advantageous rather than just relying on just a few funds. These diversified mixtures not only enhance the return on a portfolio, they also drastically reduce the downside volatility.

This analysis was put together by Michele Gambera, the chief economist at Ibbotson Associates. This study follows a couple of scenarios from Dec. 31, 1999, through the end of the first quarter in 2008.

Scenario I
60 percent S&P 500
40 percent Lehman U.S. Aggregate Bond index
The result: Grew $1 into $1.32.

Scenario II
30 percent S&P 500
10 percent Russell 2000 Index (Small Cap Stocks)
20 percent MSCI EAFE (Developed Countries Intl Stock Index)
30 percent Lehman Bond Index
10 percent cash
The result: Grew $1 into $1.44.

Scenario III
20 percent S&P 500
10 percent Russell 2000
15 percent MSCI EAFE
5 percent MSCI EM Emerging Markets Index
5 percent Real Estate Investment Trusts
15 percent Lehman Aggregate Bond Index
10 percent Bonds in non-US industrialized countries
10 percent Lehman high-yield bond index
5 percent in cash
2 percent in gold
3 percent in the Goldman Sachs Commodities Index
The result: Grew $1 into $1.72.

Diversifying your portfolio is not as simple as putting a little bit of your money into many varied investments.

It would be prudent to meet with a trusted financial adviser with clear short- and long-term goals in mind about what you want your money to do for you.

Be sure you choose an adviser with your best interest in mind. You and your adviser can then discuss an investment strategy with a reasonable amount of risk -- even in this market.

Brent A. Lindell is responsible for managing all aspects of the financial planning and investment process for the Madison office of Savant Capital Management.