A friend recently asked me what I thought the near future holds for the economy. I answered that I don't know (and suspect that no one else can know, either), but that there's a decent chance that things will get worse before they get better. (I added that I do think things will get better -- eventually.) I also mentioned that this sure seems like a great time to buy stocks, as so many are on sale.

My friend pointed out that many people are devastated right now, financially speaking. She was referring to the many people who have seen their portfolios halved, who now find their retirements in jeopardy. I do sympathize. Such situations are painful reminders of why none of us should be keeping money in the stock market that we'll need in the next five years (or even 10, to be much more conservative). Why? Well, 2008 is why. Years like that happen now and then.

On a somewhat bright side, even though these people's portfolios might be halved, odds are, they weren't going to sell all their holdings in 2009 or 2010. If they leave their nest egg (or most of it) to grow, it will likely get back on an upward trend within a few years at most.

My friend should also note that many retirees count on dividends for income more than they count on selling their (now shrunk) holdings. If that's the case, they may not be as devastated as they think -- although plenty of companies cut or eliminated their dividends in 2008. Consider:

Company

Most Recent Dividend Cut

KB Home (NYSE:KBH)

75%

Sprint Nextel (NYSE:S)

Eliminated

Sovereign Bancorp (NYSE:SOV)

Eliminated

Citigroup (NYSE:C)

94%*

MBIA (NYSE:MBI)

Eliminated

Source: Yahoo! Finance. *Preannounced dividend cut as part of TARP requirements.

In fact, some 10% of the S&P 500 companies have reduced their dividend payments at least somewhat.

That's why diversification is critical. If most of your money was in financial companies, you've probably suffered much more than the average investor. But if you're spread out over a variety of industries, you've probably fared much better. Many healthy, growing companies increased their dividends in 2008, and will likely do so again in 2009. Procter & Gamble (NYSE:PG) delivered a 14% hike, for example, while Stryker (NYSE:SYK) upped its payout by 21%.

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Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article. Sprint Nextel is a Motley Fool Inside Value pick. The Fool owns shares of Stryker. Try our investing newsletters free for 30 days. The Motley Fool is Fools writing for Fools.