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Are you worried? You should be. In particular, the baby boomers are certainly stressed out big-time, according to one 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 shaky finances, higher costs, 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.

(Go on, 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 groundwork for your scary-scenario survival "to do" list (now, write it all down!). This is the stuff you'll need to address 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 couple of articles to start -- "Prep For the Pullback Now" and "Beware the Second Leg of the Next Great Recession."

To calm your nerves as you check your portfolio's performance (you're still keeping an eye on it, right?), take a look at Motley Fool retirement expert Robert Brokamp's 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. And while Brokamp's article is a couple years old, the same message holds true today.

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 Robert Brokamp has advised his members that no 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 Procter & Gamble (NYSE: PG  ) and PepsiCo (NYSE: PEP  ) , or a low-cost index mutual fund like the Vanguard 500 Index Fund (VFINX).
  • Some international flavor -- such as Chinese search engine giant Baidu (Nasdaq: BIDU  ) and Bermudan insurer Enstar Group (Nasdaq: ESGR  ) , or a fund the likes of Dodge & Cox International Stock (DODFX).
  • Perhaps some small caps for growth potential. Vail Resorts (NYSE: MTN  ) and Volcom (Nasdaq: VLCM  ) 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 bonds and defensive stocks). 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.

For more hands-on asset allocation advice and tricks to juice your retirement reserves, consider a free trial of our Rule Your Retirement newsletter service.

Baidu is a Motley Fool Rule Breakers pick. Pepsi and Procter & Gamble are Motley Fool Income Investor recommendations. Enstar Group is a Motley Fool Global Gains pick. Vail Resorts and Volcom are Motley Fool Hidden Gems recommendations. The Fool owns shares of Vail Resorts, Volcom, and Procter & Gamble. Try any of our Foolish newsletter services free for 30 days.

This article was originally published on March 4, 2008. It has been updated by Dan Caplinger, who doesn't own any of the stocks mentioned above. The Motley Fool is not just about averting disaster, but creating opportunities in the areas of investing and consumer finance. And we have a disclosure policy!

Read/Post Comments (3) | Recommend This Article (11)

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 20, 2009, at 6:30 PM, Dannysea wrote:

    Our lives are faced with risk-management. So we buy insurance. We choose our paths carefully and still disaster looms. We eat healthy, and still the body deteriorates. There is trouble on all sides, and yet we still live.

    The hungry and less fortunate are all around us, and no matter how much we help others, still people are in need!

    To feel we deserve only good fortune to invade our lives is a myth and an ideology. Reminds me of the song Kansas sang about dust in the wind.

    How about the old saying, two steps forward, one back? Facts and hardships our forefathers faced and endured.

    And so will we!

    These hardships will be overcome if we stop taking every hardship as a personal insult.

    Thinking about the book where the world is reduced to a village of 100; if you have change at home you are in the top 20%(+/-) of the worlds wealthy.

    I have seen our housing values (personally) devalue over $1.3 million, and yet the sun rises, and there is bright hope for tomorrow! Even other investments have also dipped, and yet life is good!

    We need to each encourage ourselves and look for the great investments that are out there! While there is life, there is hope!

  • Report this Comment On October 20, 2009, at 7:15 PM, bmialone wrote:

    @Dannysea: Great post. Thank you!

  • Report this Comment On October 20, 2009, at 8:23 PM, PsycheDaddy wrote:

    This is a good article and dannysea made a good post. We have to mentally prepare ourselves as well as look at our investments. I am not in the stock market right now and it use to bother me watching them rise but I look at the long term in life, not only investments. I figure I can go thirty years if I can get through devaluation of the dollar or high inflation rates.

    Without income coming in, my stardard of living will fall by choice and my children and grandchildren will need help. I am frugal at this point in expecting the worse and if it doesn't come, I will look like a fool missing all those profits. But money is not everything, surviving is.

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