What to Do in a Jittery Market

After months of moving nearly straight up, stocks have finally seen the rally take a pause. But if you take this opportunity to make huge changes in your investment strategy, then you could cost yourself a huge amount of profit in the future.

Better the top than the bottom
Admittedly, thinking about selling stocks right now makes a lot more sense than selling them back at their lows early last year. Back then, getting out of the market was more a panicked, knee-jerk response to the financial crisis than a measured decision to reduce risk. Selling a year ago essentially locked in big losses and ensured that you'd never make that money back.

Now, though, things are a lot different. With many stocks having doubled or more from their lows, no one can accuse of you of selling low. And having fought so hard to maintain your resolve while your portfolio clawed its way back from the big losses you suffered, you certainly don't want to be overly greedy when perhaps you ought to be fearful.

That's a valid concern. But it doesn't mean you should act on it -- at least not in an extreme way.

Pullbacks happen
Market moves like we've seen over the past couple of years may give you the false impression that stocks always move in a straight line, up or down. Unfortunately, nothing could be further from the truth. And if you sell out of a rally at the first sign of trouble, then you might leave a lot of money on the table.

For instance, go back to last June. In the space of just three months, the S&P 500 had risen by nearly 40%. Many stocks, including Ford Motor (NYSE:F), Las Vegas Sands (NYSE:LVS), and Bank of America (NYSE:BAC), had seen much stronger gains as each started to overcome major threats to the viability of its business.

Then, a downturn started that took the market back down about 7%. Some saw that move as a sign that the good times were over and that bears were reasserting their dominance over stocks. Those who sold their stocks probably believed that they had been fortunate to have held through the financial crisis and reduce their losses -- at least until they saw the further gains they sacrificed:

Source: Yahoo! Finance. As of Feb. 19.

As you can see, if you let the market's headfake persuade you to sell, you locked in some pretty nice gains from the March lows. But you also missed out on the even bigger gains that followed -- giving up your chance at the kind of returns that most investors rarely see.

All in moderation
Recent experience stresses the benefits of taking a more measured approach to your investing. After your stocks have had strong gains, then it might well make sense to rebalance your portfolio and sell a portion of your holdings, keeping the risk level of your investments in line with your overall investing strategy.

But as long as nothing has changed fundamentally about the companies you invest in, then dumping all your stocks just doesn't make sense. Just because they're no longer trading at bargain-basement prices doesn't mean that they're not still a good investment.

So if you find yourself increasingly nervous when the market stops going up like a bullet, think about your expectations and make sure that you're not being unrealistic. Market downturns are inevitable. But if you choose stocks of companies that can get through tough times -- and have the discipline to hold onto those stocks even when they temporarily lose value -- then you'll see a big difference in your total returns over the long run.

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