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The Short Answer

What to Do When Your Investment Tanks

The first lesson is don't panic.

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The market has taken investors on a wild ride over the past year. While there have been a few bright spots in the short term, this wild ride has mostly been in a downward direction, highlighted by some spectacular individual failures. The collapse of Bear Stearns back in March was one of the biggest, and  Fannie Mae (FNM) and  Freddie Mac (FRE) are now teetering on the edge of a government bailout after falling around 90% this year. Quite a few other stocks are down more than 50% this year.

Among mutual funds, too, there have been some startling drops.  Regions Morgan Keegan Select High Income (MKHIX) has fallen more than 60% this year, virtually unheard of for a bond fund, and  Schwab YieldPlus (SWYPX) is down about 30% despite being in the supposedly safe ultrashort bond category. Many emerging-markets funds, especially those focused on India or China, are down 40% or more for the year.

When an investment takes a major tumble like that, many people's first reaction is to sell. That's an understandable response, and sometimes it's a reasonable one. In other cases, though, a big drop in price is no reason for panic, and may even be a buying opportunity. There's no sure way to tell the difference, but it's possible to get enough clues to make an intelligent decision.

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David Kathman does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.