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Avoid the risk! Don’t lose your hard-earned cash

If you can't commit to staying in the market despite its ups and downs, you're treading dangerous waters, particularly if you're not an experienced investor. TODAY Financial editor Jean Chatzky explains how to become a successful and patient investor.
/ Source: TODAY contributor

For years, I've been preaching the mantra that boring is better when it comes to your investments. In fact, if you've been reading this column for any length of time, you know that my strategy is to come up with an asset allocation that you can live with and then dollar-cost average into the market on a regular, automatic basis.

Given the state of today's market, you might be thinking that I've changed my tune. But, in fact, this economy has only served to validate my position. If — at the onset — you can't commit to staying in the market despite its ups and downs, you're treading dangerous waters, particularly if you're not an experienced investor. You run the risk of overthinking the situation and making investment decisions that not only aren't rational, but are emotional as well. In other words, you run the risk of losing your hard-earned money. That's why now — more than ever — you need to dial in to your patient side.

Set it and forget itWhen I saw "The Gone Fishin' Portfolio," a new book by Alexander Green, I knew I had to talk to him. He's been getting a lot of press these days because the portfolio outlined in his book can be managed in just 20 minutes a year, a strategy that is right up my alley. How did he do it? The key is very careful asset allocation. Green selected a range of asset classes that move independently of each other, so even when part of the portfolio is down, another portion will likely be up. "I tried to put together a blend of assets that will all give a better return than inflation over time, but when mixed together, give you a higher degree of return with less risk," Green explains.

If you have faith in your asset allocation and you're properly diversified, you can rest easy that your portfolio will come out on top without a lot of tinkering on your part. If you're unsure, it's worth seeing a financial adviser for help. These days, there's even that charge by the hour.

Have a planIt doesn't have to be hugely detailed, but at the very least, you need a few rules in place that govern your reaction to the market. "Most people don't; they invest emotionally," says Green. "But if you're going to have investment discipline, that means sticking with your plan in good times and in bad times. You have to realize that the market has ups and downs."

Here's the deal — if you can't sleep at night, you need to change your asset allocation because you're clearly taking more risk than you can tolerate. I'm not suggesting that you sweat it out to the detriment of your mental health, and neither is Green. But what I am suggesting is that you set your asset allocation to a level of risk you can handle, then decide how much your budget will allow you to save each month. Once you have a figure, whether it's $100 or $1,000, put it on autopilot and continue to invest that amount whether the market is up or down.

Recognize your goalAsk yourself: Why are you in the market in the first place? For most people, the end goal is a comfortable retirement, and it simply can't be reached without taking a little risk. If you forgo investing and just save in a standard money market account, your money isn't going to keep up with inflation, meaning you'll actually lose money over time. Keeping up with inflation means ceding a little control. "No one likes uncertainty. As a general rule, it's frightening. But what people tend to overlook is that there really is no alternative. The markets are always uncertain," says Jason Zweig, author of "Your Money and Your Brain."

There are, of course, circumstances when a money market is the way to go. If you're saving for a short-term goal — think five years or less; like a down payment on a house or your children's education — you're better off keeping that cash out of the market right now. You don't want to run out of time before you can recover from a big loss.

Don’t forget the basicsSave early, save often is a line you probably hear a lot, and it's an important one. Risk and return aside, the amount you stash away plays a big part in the number you'll have when you hit retirement age. "I tell people that there are only six things that will determine the future value of a portfolio," says Green. "The amount of money you save, the length of time you let it compound, what your asset allocation is, the market's annual return, the expenses you absorb and the taxes you pay." Don't get so caught up in the market's waves that you overlook these important rules of thumb.

Control everything elseYou have no say over the stock market. But you can control how you spend your money. You can choose to keep your credit card in your desk drawer at home when you go out. You can decide to put a little extra money away each month so you have an emergency fund at the ready. Having a grasp on the rest of your financial life will help you remain calm if (and when) the market takes another dip.

With reporting by Arielle McGowan.

Jean Chatzky is an editor-at-large at Money Magazine and serves as AOL’s official Money Coach. She is the personal finance editor for NBC’s TODAY Show and is also a columnist for Life Magazine. She is the author of four books, including 2004’s “Pay it Down! From Debt to Wealth on $10 a Day” (Portfolio). To find out more, visit her Web site, .