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Everyone is feeling the pain of the market's dramatic decline right now, but how you manage the situation can ultimately make a difference. These five steps can help you get your footing back:

1. Breathe. I'm not kidding. Take several, slow, deep breaths. This relaxation technique works by slowing your heart rate and your racing mind.

2. Take control. Separate things you can control from those you can't. Bank of America (NYSE: BAC  ) cuts its dividend. GE (NYSE: GE  ) reduces its earnings guidance. The Dow drops 7% in a day. You have no control over these things, and there's no point in remaining fixated on the event. Once they've happened, the only productive use of your mental energy is to assess them in the context of the long-term health of your portfolio, and decide whether or not you want to make any adjustments. That's your sphere of control.

3. Always come back to the business. Nearly all stocks are taking a beating right now, but not all businesses face the same risks in this crisis. Some face an existential risk or a shift in their business model, others don't. It should be clear that Morgan Stanley (NYSE: MS  ) and Goldman Sachs (NYSE: GS  ) aren't in the same position as ExxonMobil (NYSE: XOM  ) or Wal-Mart (NYSE: WMT  ) .

Look for mines in your portfolio – in particular, among financial firms and companies that are highly leveraged. Regardless of the market environment, there are two main causes of bankruptcy: an unprofitable business model and excessive leverage. In an environment where credit has dried up, the threshold for "excessive" is that much lower.

4. Valuation matters. Review the valuations of the stocks in your portfolio. Ignoring the direction and size of stock price movements for a moment, ask yourself whether the current valuations of the stocks you own make sense in the context of the company's earnings power.

As I watch Microsoft (Nasdaq: MSFT  ) – which I own -- change hands at 10 times consensus earnings for the current fiscal year, I don't see how such a depressed valuation is sustainable over the long term. This gives me great confidence that I should continue to hold the stock. For every stock you own, ask yourself: "If I didn't own this stock today, would I want to own it at its current price?"

5. Don't track your portfolio on a minute-to-minute basis, and watch less financial news. The extraordinary immediacy and availability of information is the boon and the curse of our age. Continually watching your portfolio is corrosive to the kind of mind-set you need to adopt under these circumstances. Repeated doses of negative feedback simply play havoc with your hormonal system.

Stay calm, stay focused and you'll make better decisions. Oh, and don't forget: the market is just one part of your life. Make sure to continue allocating time to the activities and people you love.

Further credit crisis Foolishness:

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Fool contributor Alex Dumortier, CFA has a beneficial interest in Wal-Mart and Microsoft, but not in any of the other companies mentioned in this article. Bank of America is a Motley Fool Income Investor selection. Wal-Mart and Microsoft are Motley Fool Inside Value recommendations. The Motley Fool has a disclosure policy.

Read/Post Comments (6) | Recommend This Article (30)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 11, 2008, at 2:12 PM, jfcdac wrote:

    Excellent, practical advice... especially the last paragraph.

  • Report this Comment On October 12, 2008, at 2:37 AM, 2cccal wrote:

    Question - how advisable is it for Americans to invest in Canadian energy stocks such as Pengrowth Energy (PGH)? They pay high dividends even though Canadian tax has to be paid on this.

  • Report this Comment On October 12, 2008, at 10:44 AM, TMFAleph1 wrote:


    Thanks for your comment. If you're focused on dividends, why invest in Canadian energy stocks when there are plenty of home-grown pipeline MLPs to choose from?

    Alex Dumortier (XMFMarathonMan)

  • Report this Comment On October 13, 2008, at 9:50 AM, catoismymotor wrote:

    The stocks that I have studied, researched, pined over and purchased are down 30-50% from their highest point. Whoo-hoo! Wall Street is having a red tag sale. This is your big opportunity. Do your homework. Be smart. Make wise choices. Don't count on the government to make things better. It is time to give yourself a hand up and to bail out yourself.

  • Report this Comment On October 15, 2008, at 5:41 PM, JakilaTheHun wrote:

    That last piece of advice strikes me as the best. The financial media sensationalizes everything.

  • Report this Comment On October 17, 2008, at 11:14 AM, Vjklander wrote:

    One thing I don't see mentioned at all is that this is a most excellent time to re-allocate. Also, since I sold my CEG and MOS in May with had huge gains, I sold most of my non-dividend stocks that are down with losses to offset the gains. This generated some good cash before the deep drops which I am now shopping with. ;)

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