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With market in turmoil, here's what you should do

The recent tremors in the stock and bond markets are unnerving — and may leave average investors feeling as if they should be doing something to protect themselves.

But if any lesson should have been learned from the last recession, it was the importance of having a well-diversified portfolio and resisting the urge to sell in a state of panic.

So consider the recent gyrations as a warning signal — not of impending market doom, but a nudge to ensure your investments are on firm footing to withstand whatever happens to blow through the financial markets.

"This is a reminder that the market goes up and the market goes down, and this is normal," said Stuart Ritter, a senior financial planner at T. Rowe Price. "One of the worst things people can do is draw the conclusion that something different has happened and therefore they should abandon their strategy. The flip side of that is they should have a strategy in place, and not one that is driven by what the market did in the past three hours."

Here are some ideas on how to ensure your portfolio is still working for you:

CONTEXT As of Wednesday's market close, the Standard & Poor's 500-stock index was down 7.4 percent from its high of 2011.36 on Sept. 18. Technically speaking, it takes a 10 percent plunge to qualify as a correction, and a 20 percent fall to move into bear market territory, said Howard Silverblatt, at S&P Dow Jones Indices.

Also on Wednesday, the yield on the 10-year Treasury note briefly fell below 2 percent, crossing a symbolic threshold that signaled investors were rushing for safety; bond prices and yields move in opposite directions, so prices on longer-term bonds increased.

In other words, diversification worked: while stocks slumped, longer-term bond prices picked up some of the slack.

INVESTMENT MIX An investor's ideal mix of stocks and bonds will vary based on overall goals, age, time horizon and personal circumstances. It's one of the most important decisions investors can make because it determines how much risk they are willing to take in exchange for a chance at a decent return, experts said.

"The right asset allocation is the one that brings you to your financial goal because you're able to maintain it during all market conditions," said Rick Ferri, the founder of the money management firm Portfolio Solutions and author of All About Asset Allocation.

Investors can find some different combinations of stocks and bonds that can serve as guideposts. For example, people who are three to five years from retirement with a moderate tolerance for risk might split their money evenly between stocks and bonds, though a more conservative investor might put only 30 percent in stocks. A younger saver early in her career, for instance, might consider anywhere from 60 to 80 percent in stocks, he said.

RISK TOLERANCE Think back to the severe market downturn in 2008 to 2009, which served as investors' ultimate test. Were you able to ride out the market tumult? Investors who felt compelled to do something, or who dumped piles of stock holdings, were invested too aggressively, financial advisers said. If the most recent gyrations are tempting you to make rash moves, then your investment mix is probably too heavily tilted toward stocks.

This is important for everyone, but probably even more so for retirees; selling stock funds while they are down will either lock in losses, or if the investors try to get back in the market there will be less time for them to recover. "Pick an asset allocation range for stocks you can live with for the long run," said Allan Roth, a certified financial planner in Colorado Springs.

BOND CHECK During the financial crisis, many investors realized that they were holding bonds that were riskier than they thought, and they didn't provide an adequate counterbalance against plunging stocks. Bonds are also sensitive to interest rates, which is why you want a diversified portfolio of bonds that won't fluctuate too much if rates move too far in one direction.

That is why investors are usually best served by holding bonds in low-cost index mutual funds that invest in a diversified array of high-quality holdings, financial advisers said.

"Make sure your bonds are high-quality, or mostly U.S. government-backed," Roth said. "The last thing you need is your bonds to get crushed when your stocks do, as what happened to many in 2008 and 2009. Bonds need to be boring and hold value."

REBALANCE This is the process of trimming back winning investments and reinvesting the money into laggards so that a portfolio maintains the overall mix that was originally set. But this can make investors uneasy since they are buying losing investments. Some opt to remove the emotion from the process and use services that will rebalance automatically. "Sometimes it is counter-intuitive to rebalance after a period like this, but that is where you can receive some of your benefits," said Reed Fraasa, a financial planner in New Jersey.

GETTING ADVICE For investors who don't feel confident enough to sort this out on their own, it is possible to find an unbiased, fee-only financial planner through organizations like the National Association of Personal Financial Advisors, the Garrett Planning Network or XY Planning Network. There is also a growing industry of online investment managers — sometimes called robo-advisers — that will handle the entire task for a relatively modest fee.