Buying opportunity? Time to panic? How to think amid roiling markets

Let's be honest — if you are an investor, you are uncomfortable in this volatile stock market. But should you be?

There is only one situation (unless you have borrowed a bunch of money against your stocks) where this kind of market should make you nervous and none that should make you panic. Let me break down how you can generally think about this.

If you are young and investing, this market disruption is great for you. Since hopefully you are buying stocks in your 401(k) or IRA, then the best market for you is a lousy one. Why? Because you keep getting to buy at low prices. In fact, if you are in your late 20s, you would love the market to stink for the next several years so you can build cheap positions and then sell when it inevitably recovers. Stocks are calling when the market is falling. So not only should you not panic, you should step up your investing.

Hopefully you have set aside money that you need in the next three years. While I don't see a 2008 correction, short-term predictions are just guesses. Three years can generally get us through a market cycle, so if you are investing for a shorter time frame, you are speculating. Define your time horizon, but many of us underestimate it.

If you are saving for retirement, your time horizon isn't the date you retire, it is the decades you anticipate living post-retirement. So for those a year or two from retirement, you want to determine what income you know will have coming in (Social Security, pension, etc.) and set aside the rest of your two-year spending needs in cash. Everything else can be invested.

If you have saved some money to pay for your child's college costs, you have options. If you have saved for one or two years of college, your decision is do you want to be safe and move that to a guaranteed account? Or do you want to plan on using this when and if the market recovers — all the way up to years three and four? The advantage of going guaranteed with some of the funds, is that you can dollar-cost average into a 529 and continue to get great prices on the stocks that you will be selling later. If you have more than one child and haven't fully saved for either, your time horizon is really the duration of their combined college years.

If you need to spend money in the next couple of years, then staying invested is like gambling. Figure out how much discomfort you are willing to tolerate and act accordingly. But short-term investors should be sweating and hopefully won't make the same mistakes again.

Spend your life wisely.

Ross Levin is the chief executive and founder of Accredited Investors Wealth Management in Edina.