Nobody's thinking about losses right now, thanks to the current rally in stocks. But no matter whether the market keeps rising or falls back to retest its recent lows, sooner or later you'll again have to deal with losing stocks in your portfolio. What you do when that happens will make a huge difference in your long-term investing results.

Even pros feel the pain
In this month's issue of the Fool's Rule Your Retirement newsletter, Foolish retirement expert Robert Brokamp talked with fund manager and former Foolish writer Whitney Tilson. In reading through the interview, I thought one of Tilson's most interesting comments was this one, about dealing with the big market drop in March:

Literally the day the market was bottoming [March 9] I said, "We wake up every day with two feelings: We berate ourselves for being such idiots, and the second feeling is we want to sell everything and go to cash just to stop the pain." I wrote that very deliberately, because I know that virtually every other investor on the planet was feeling the same way. I wanted people to know, "Hey, just because we are professionals and we have been doing this for more than 10 years doesn't mean our feelings are any different."

Thinking back to that day, it's easy to understand how even the most experienced investors would have entertained the thought of getting out of the market entirely.

But the key was that Tilson didn't sell. As a result, one of the funds that Tilson manages, the Tilson Focus Fund (TILFX), has risen 60% in the past three months. Many of his stock picks have done even better:

Stock

3-Month Return

Huntsman (NYSE:HUN)

169%

Helix Energy (NYSE:HLX)

202%

American Express (NYSE:AXP)

118%

Citigroup (NYSE:C)

216%

Dr. Pepper Snapple (NYSE:DPS)

76%

Source: Morningstar, Yahoo! Finance.

Chances are that some of the stocks you own have also done very well since early March. If you've held on to earn back some of the money you've lost, you know firsthand just how important it is not to give in when your nerves are telling you to get out.

3 ways to stay in control
Once you realize that you need to be calm no matter what the market throws at you, the next step is figuring out what you can do to make that task easier. Here are a few ideas that will keep your emotions at bay:

  • Have a plan. Tilson points to the analysis he does to determine his view of a stock's intrinsic value as essential to giving him the conviction you need to stick with an investment through hard times. When you buy a stock, make sure you understand why you've bought it, and take notes that you can refer back to later. In addition, think about what sorts of events might change your mind about a company's prospects and lead you to sell the stock. That keeps you from making reflex decisions when you've just gotten a big surprise.
  • Diversify. Fund managers are accustomed to dealing with concentrated portfolios, where a big drop in a single stock can really have a big impact on a fund's overall returns. But even if you only have a modest amount to invest, you can build a diversified portfolio with funds and ETFs. Although that diversification means you'll probably never triple your money in a matter of months, you also won't be risking a lot of money on any one company's prospects.
  • Focus on the business. It's too easy to look primarily at stock prices without looking at the underlying news that makes those prices move. For instance, after big news items like Valero Energy's (NYSE:VLO) earnings warning or a big same-store sales drop at Abercrombie & Fitch (NYSE:ANF), shares spiraled downward, and many shareholders just sold immediately. But instead of just looking at tumbling shares, you should also look closely at what impact that news will have on the underlying business. That will let you make a more informed choice.

Don't worry if you're scared when the markets fall. That's natural, and there's nothing you can do to avoid it. What you can do, though, is prevent your fear from forcing you to make mistakes. Once you learn that, you'll have one of the most valuable investing skills you'll ever know.

For more on investing for retirement and beyond, read about:

Read all of Tilson's interview in this month's issue of Rule Your Retirement. If you're not a member, signing up is easy -- just click here for a 30-day free trial that will give you full access.

Fool contributor Dan Caplinger ain't afraid of no ghosts. He doesn't own shares of the companies mentioned. The Fool owns shares of American Express, which is a Motley Fool Inside Value recommendation. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy is worth a fortune.