WSJ's Zweig: Four Key Questions in Dealing with Market Risk

The risk of investing in financial markets has been hammered home recently by the surge in volatility. The CBOE Volatility Index (VIX) has soared 33 percent since the S&P 500 Index hit a record high Sept. 19. 

So how can nervous investors cope with this risk? Wall Street Journal columnist Jason Zweig says that answering four crucial questions will give you some guidance.

• "What did I do in 2008 and 2009?" he writes. Look back at your account statements. If you sold then, you'll probably sell in the next panic too, he says. "So you better not have greater stock exposure now than you did in 2007.
• "How flexible are my goals?" If your spending plans are set in stone, you better limit your risk, so that you don't blow that cash.
• "What risks have I protected against?" If you want to guard your portfolio against a stock plunge, "the best insurance is plenty of cash and investment-grade bonds," Zweig says. "Make sure you have it now."
• "Have I turned rules into habits?" If you haven't practiced your rules repeatedly, you may abandon them in the clutch. 

Meanwhile, if you're an income investor, Christine Benz, director of personal finance for Morningstar, cites several myths you should keep in mind. 

• "If rates are going to rise, you're always better off buying individual bonds than bond funds," she writes on Morningstar.com. You actually may rack up excessive trading costs in buying individual bonds
• "Dividend-paying stocks are safer than bonds."
• "Cash is safer than bonds." While technically true, your cash will be eaten away by inflation.

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