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Start Worrying. Seriously.

The economy, interest rates, housing, credit, candidates -- so much for slow news days.

Are you worried? You should be. The baby boomers are certainly stressed out big-time, according to a recent retirement survey. In fact, no matter what "Gen [fill-in-the-blank]" you are, fretting about the state of your finances may be the most productive thing you can do to weather today's uncertain economic times.

Embrace your financial angst
This threat-onomics approach may sound bully-ish, but there is some sound science behind the benefits of embracing one's concerns.

A Yale University economics professor discovered that financial angst -- specifically, the threat of losing money -- was the most effective motivator for him and other dieters to lose weight. By marrying his private struggle and his professional work, he found that the solution to a well-known behavioral economics shortcoming (that people don't always do what they claim they want to do) was to counter it with the principle that incentives -- in this case, facing a loss of capital -- get people to do things.

In other words, want results? Risk some real dough.

Taking a look at what we're facing today, it seems that all the key principles are in play:

  • Negative incentives? Check. (That'd be tanking portfolios, diminished savings, and endangered quality of life, as if you need a reminder.)
  • A goal to strive for? Check. (Averting financial disaster, I assume.)

So now that I've gotten you all worked up about the state of your financial affairs, let's do something constructive with all that built-up angst.

Face your "Frightmare on Wall Street"
Instead of rocking back and forth on the floor in the fetal position, try this Behavioral Psych 101-style exercise:

Think all the way through the likely outcome of your worst economic fears. Ask yourself: "What would happen if [insert dreaded event] were to actually take place?" Cover all the scenarios that keep you awake at night -- house values tanking in your neighborhood; you or your spouse losing your job; your 401(k) savings remaining stagnant for five years. (Push through the pain. I've got tissues on standby.)

As you perform this fire drill, you're pinpointing specific vulnerabilities in your financial plan.

Congratulations, you've just laid the ground work for your scary-scenario survival "to do" list (write it all down!): the stuff you need to do to improve the outcome of whatever fright you face.

Now you know what you need to do to dampen the effect of those economic jitters. Heck, you may have even discovered that the macroeconomic messes disrupting your sleep are not as big a threat to your way of life as you feared. (If so, there's plenty else to worry about, like baseball scores, your nephew's latest piercing, and the new season of American Idol.)

It's time to deal with it
The Motley Fool is not about to abandon you in your time of need. We've got plenty of strategies (and chamomile tea, if that'll help) to help you put your finances on solid ground. Here are a few articles to start -- “Recession-Proof Yourself” and “Ready Your Job for Recession.”

To calm your nerves as you check your portfolio's performance (you're still keeping an eye on it, right?), Motley Fool retirement expert Robert Brokamp offers an eye-opening history lesson in “The Stocks Shall Rise Again!” Spoiler alert: Over short periods of time, stocks will whipsaw all over the place. But those who invest in businesses they believe in over the long term will be rewarded for their perseverance. 

Remove the fear factor from your investments
As for keeping those nerves calm during rocky times, it's all about spreading out the risk. In portfolio-building terms, that means holding a mix of investments that don't move in lockstep with one another. Rule Your Retirement's Brokamp advises his members that not one single investment should comprise more than 10% of one's overall portfolio. That, too, is a solid piece of advice for peace of mind.

An example of that mix is:

  • Stalwart blue chips, such as dividend payers AT&T (NYSE: T  ) and Merck (NYSE: MRK  ) , or a low-cost index mutual fund like Vanguard 500 Index Fund (VFINX).
  • Some international flavor -- offered by the likes of Dodge & Cox International Stock (DODFX).
  • Perhaps some small caps for growth potential. Netflix (Nasdaq: NFLX  ) and Buffalo Wild Wings (Nasdaq: BWLD  ) fit that category, or iShares S&P SmallCap 600 Value Index (NYSE: IJS  ) , if you prefer broad-based funds.
  • And finally, some bonds and cash for good measure.

As for how much of what you should hold where? The layer-cake approach is a great place to start. The biggest hunk (funds invested in large-cap U.S. stocks) forms a solid foundation. The next two layers are a diverse mix of investments; some expose you to growing sectors for a boost in returns (those small- and mid-caps), and others protect you from bear markets (think international). As you reach the top of your cake, consider minimal exposure to some alternative investments (like real estate investment trusts). And, finally, fill in the top layer with individual stocks, and you're Foolishly invested for the long term.

With rules like that in place, it's a lot easier to stomach the kind of volatility we're seeing today. So I say: Go ahead, embrace your angst. Use it as the impetus to revisit your financial plan and kick the tires on your portfolio (see the links below for more guidance on both of those). And remember, no matter what the headlines blare, this is personal, people. You've got plenty of say in how it plays out on your turf.


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