(Editor's Note: Do you know your investment risk comfort level? Peaceful Wealth columnist R. Scott Maxwell is offering a complimentary online Personal Financial Risk Profile evaluation ($30 value) to Market Cap subscribers. Contact Scott today at smaxwell@talisadvisors.com for your login and password.)

How do you invest when markets are down? Conventional wisdom tells us that down markets are the playground of experts, ideally suited to those incredibly wise stock pickers and market timers who scrutinize balance sheets, market charts and historical evidence to uncover profitable opportunities hidden to amateurs investors (yes, they mean you).

The argument feels right. If the behavior of the average investor is as fickle and myopic as the behavioral sciences tell us, then only those with the gift of spotting hidden opportunity and willing to burn the midnight oil will keep their focus when the masses are irrationally fleeing to the hills.

If the rising tide of a bull market floats all boats then it only bears to reason that skillful selectivity is the defining determinate of success when markets take a dive.

You’ve seen the headlines. “Recession-proof stocks” “Timely picks in a down market” “10 stocks to beat a bad market” “What not to buy in a bear market”

Guess what. The advice may be timeless, but it is also practically worthless.

The Wall Street Journal reported on May 31, 2008 that mutual fund managers, those highly compensated experts who oversee the stock picking and market timing strategies of billions of investment dollars, aren’t faring too well.

The Journal commissioned Morningstar to rate fund managers during our current rough market. Their findings were illuminating. It turns out the majority of the stock picking and market timing mutual fund expert managers are underperforming the market this year just as they do when times are good. Their funds are below their benchmarks in six of nine major categories.

No, down markets do not allow stock pickers and market timing strategist to bask in the glory of their collective wisdom.

Sure, you will read about someone who timed things beautifully or picked a stock that soared above the global fray. It is a statistical inevitability; just as it is inevitable someone will win the lottery even though statistically any individual lottery ticket owner’s chances of winning are less than her chance of being hit by lightning.

Your challenge is discerning what to do before you have the benefit of 20/20 hindsight.

When times are tough, as they are right now, the most important thing you can do is formulate a plan and stick to it for the long-run.

Here is a five-step action plan for investing in troubled times:

1. Know your personal risk comfort level. Have you ever analyzed your tolerance for risk? Every investor should know how much market risk they can comfortably tolerate. Think of it as a “sleep at night score”. How much volatility can you stomach before you are pacing the floor worrying if you will lose every dime you have if the market does not improve tomorrow?
2. Know your portfolio risk profile. Do you understand the potential for short-term losses inherent in your current investment strategy? Time and time again investors find themselves chasing a hot strategy or buying the darling stock of the day without regard to a long-term investment philosophy. They have no appreciation for the potential volatility of their speculative transactions. You must learn, or rely upon a trusted advisor, to develop a broadly diversified portfolio that is in tune with your objectives and designed for your comfort level.
3. Know your return objectives. Sure, we all want to buy a hot stock that makes us rich beyond our dreams. Dreams are a wonderful thing. Fortunately, the realities of a prudent, long-term investment strategy can help you achieve those dreams. It simply takes time, patience and wisdom.
4. Create an Investment Policy Statement. What are your investment goals? How do you plan to achieve them? Where will you turn to rate your performance? Are you committed to consistently implementing your strategy over the long-run? Your answers to these questions form the foundation of your investment philosophy. The wise investor acknowledges their return objectives and realistically evaluates their personal risk comfort level to design a globally diversified, low cost, asset-class portfolio ideally suited to achieve their goals.
5. Implement your plan through thick and thin. In his seminal book “Stocks for the Long Run”, University of Pennsylvania Professor of Finance Jeremy Siegel tells the story of John J. Raskob. Mr. Raskob was a senior financial executive at General Motors who recommended in a September 1929 article titled “Everybody Ought to be Rich” that every investor should put $15 a month in ‘good common stock’. He predicted the modest investment would grow to over $80,000 (a 24% per year return) by 1949. The October stock market crash of 1929 made Mr. Raskob’s advice look foolish in the eyes of many. It turns out Mr. Raskob got it right. A patient, long-term investor who bought $15 of the U.S. stock market in September 1929 and kept buying $15 each month for the next 30 years saw their money grow to over $60,000 for a remarkable average return of 13% per year.

The evidence is clear. Down markets are inevitable. You cannot avoid them, nor must you try in order to achieve your goals.

Now, more than ever, isn’t it time you entrust your retirement to someone who knows the path to Peaceful Wealth?

R. Scott Maxwell is a Vice President and Wealth Management Coach at Talis Advisors, a wealth management firm headquartered in Plano, Texas. He is committed to teaching investors the truth about the stock market. Scott and the team of professionals at Talis Advisors manage beautifully diversified, low cost portfolios for clients throughout the United States, offering independent investment advice based on Nobel Prize winning research with a focus on maximizing returns, maximizing value and maximizing safety to meet client objectives. Scott can be reached at 972-378-1794 or 866-608-2547 or by email at smaxwell@talisadvisors.com. You can also contact him via their less than subtle web site FireYourBroker.net.