Feeling panicky? Here are four reasons not to overreact

Market timing is a losing strategy.

You may be thinking you should sell now and get back into stocks later when the market "settles down" and the economy starts to recover. But this approach—called market timing—can lead to disappointing returns. In effect, it puts you at risk of selling low and buying high.

"Market timing is extremely difficult," said Donald G. Bennyhoff, a senior investment analyst with Vanguard Investment Strategy Group. "To profit from market timing, you have to be able to get out before the low and be able to get back in before the market moves decidedly higher. It's impractical. It may sound good in theory, but market timing mostly fails in practice."

Investors have been rewarded for taking risk.

The steep and sudden stock market drops we've seen recently are certainly unsettling and may have done serious damage to your portfolio. But this very risk is why, over the long term, stocks have outperformed bonds or cash investments. "To take the risk of investing in stocks, people have to see a higher return potential than they would get from a typically safer asset," said Mr. Bennyhoff. "Taking risk isn't always rewarded in the short term. But, historically, risk has generally been rewarded over the long term in the form of higher average returns."

Playing it "safe" can lead to a shortfall.

Right about now, fleeing stocks for the safety of U.S. Treasury bills or an FDIC-insured certificate of deposit seems very appealing. For your short-term financial needs, these cash investments can be good choices. But, they may not be suitable for your long-term goals—like saving for a comfortable retirement—because the returns are likely to be too low.

Remember, your investments will need to outpace inflation over time, otherwise you'll lose purchasing power. Historically, it's been stocks that have helped investors compensate for inflation by delivering higher average annual returns than cash investments or bonds.

"It's very important to consider that risk is not only market risk; other risks like inflationary risk need to be part of that equation," Mr. Bennyhoff said. "Even investors about to retire may still have investment horizons of 20 or 30 years so they still need to consider the effects on their portfolios of inflation. Stocks, with their higher after-inflation returns, have a record of helping investors preserve their purchasing power."

Emotional decisions often lead to regrets.

In times of market turmoil, it's difficult to take a long-term view and resist the urge to react to the latest big swing in the financial markets. Our instincts tell us we have to do something now. But Mr. Bennyhoff suggests staying calm can help you avoid making moves you later regret.

"Generally speaking, it tends to be a very bad idea to make emotional decisions in times that are already emotionally charged," he said. "If the market had a bad day yesterday and you come in today and sell, that doesn't make up for yesterday's losses. Actually, what you're doing is just capturing your losses."