Last summer, when the market seas first started getting really choppy, I wrote an article suggesting that retirement investors not worry too much about the rough waters. Just wait it out, I said -- or think of it as a sale on good stocks, and take the opportunity to buy more at a discount.

At the time, the market action looked like it might just be a correction -- a short, sharp downward blip in an ongoing bull market that, while stomach-churning, probably wouldn't last all that long. But here we are a year later, and the correction never really bounced.

In fact, many corners of the market are still downright ugly. Is it time to panic and sell everything?

Letting the bear do his thing
The easy answer is, again, "just ignore it for a while." But when the stories of soaring crude prices and continued market weakness are everywhere, it's hard not to think about it. And even if you successfully avoid the temptation to log in and check your account balances, sooner or later -- maybe this week -- your quarterly statement arrives in the mail. Ouch.

Humans aren't always rational about losses. We're not wired to be. Thanks to a well-researched behavioral phenomenon called loss aversion, we feel hurt from losses more acutely than we feel joy from gains -- twice as much hurt, say some studies.

If you own and watch volatile stocks like II-VI (NASDAQ:IIVI), LoopNet (NASDAQ:LOOP), or (NASDAQ:CTRP), and you've felt your gut wrench on the downward swings, you know exactly what I'm talking about. Up is nice, but down can be awful.

When we feel pain, we want to take action to stop it. The easiest action to take in the face of widespread market pain is to sell it all and walk away before it gets even worse, and then buy back in when the bulls return. It's a hard temptation to resist. But as my Foolish colleague Paul Elliott pointed out not long ago, that temptation is the "real threat facing investors today."

The price of selling now
Think you can just buy back in later? Think carefully. No matter what stories you've heard about your best friend's uncle's cat's financial advisor, who sold all his tech stocks in February 2000 and bought the good ones back right at the bottom for a tenth of the price, timing market peaks and troughs is almost impossible to do.

Even market gurus like Ken Fisher, who famously got his clients out of tech stocks like Cisco (NASDAQ:CSCO), Yahoo! (NASDAQ:YHOO), and Broadcom (NASDAQ:BRCM) right before the tech bubble burst in 2000, couldn't do it twice in a row. He got back in a year too early and lost a bundle. 

OK, what do I do?

  • Don't sell -- unless you would anyway. If a stock you own has peaked after a hot run, if shifts in business conditions have dampened the prospects of another -- in other words, if your reasons for holding the stock are no longer valid -- that's the time to sell. Listen to your brain, not your fears. When in doubt, inaction is a fine course of action.
  • Look for value. Has Mr. Market put your favorite stocks on sale? This is a great time to put new money into stocks with strong fundamentals that have taken hits from broader market conditions. A friend of mine bought Apple (NASDAQ:AAPL) for less than $10 about five years ago, when tech stocks were still unloved castoffs. It's over $170 now. Think about the returns on that one.
  • Don't miss the bounce. Bear markets tend to be long slow grinds downward, but they tend to end with very sharp upward leaps. If you miss even the first few days, it could cost you a bundle.

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