With the markets going up and down, older investors may be tempted to flee from stocks. Consider these age-based strategies first, before making any moves. By Kathryn A. Walson, Staff Writer September 9, 2010 EDITOR'S NOTE: This article was originally published in the July 2010 issue of Kiplinger's Retirement Report. To subscribe, click here.Here we go again. Just when you thought that the huge stock market swings were over, the Dow Jones industrial average fell below 10,000 in late May after topping 11,000 in April. You may be tempted to slash your stock holdings or flee the market. But take a lesson from the recent bear market. After crashing to a March 2009 low of 6547, the market began a steady climb. Many investors who abandoned stocks when the market dropped to its lowest point missed out on the big upswing. The best thing you can do is to ignore the day-to-day peaks and valleys. Otherwise, you end up selling when stocks are low and buying when stocks are high. "Don't let emotions guide your investment decisions," says Stephan Cassaday, a certified financial planner in McLean, Va. "The tradeoff for these volatile periods is that in the long term, stocks come out ahead." Advertisement You can remain calm during the turbulence by diversifying your holdings. And take your age into account when you craft your asset allocation. You will lose less sleep if you look at your stocks as a long-term investment rather than as a short-term piggy bank. While the stock market may seem like a heart-stopping roller coaster, diversification will help smooth out the ride. Even if your diversified portfolio took a hit in the bear market, you likely would have suffered more-serious losses otherwise, according to a Fidelity study. The study looked at three hypothetical portfolios: a diversified portfolio of 70% stocks, 25% bonds and 5% cash; an all-stock portfolio; and an all-cash portfolio. Between January 2008 and February 2009, the all-stock portfolio would have dropped 48.2%, while the diversified portfolio would have fallen 33.9%. The all-cash portfolio fell only 0.02%. But the all-cash portfolio missed out on the market upswings. Between March 1, 2009, and April 30, 2009, the stock portfolio would have risen 19.2%, the diversified portfolio climbed 11.7%, and the all-cash inched up by 0.03%. And while a diversified portfolio will not maximize gains in a rising stock market, the study says, it will limit losses when the market dips. Advertisement Take heed of the following age-based strategies. And take a look at Kiplinger's model portfolios for investors with varying time horizons (use our Pick the Portfolio That's Right for You tool to see the model portfolios). For workers 55 to 64. In your last working years, your stock holdings should be about 60%, depending on life expectancy and risk tolerance. If you can't sleep at night, scale back on stocks by five to ten percentage points. "You'd better plan on having this money work for you for 30 to 40 years," says Jerry Miccolis, chief investment officer with Brinton Eaton, in Madison, N.J. If you moved out of stocks during the 2007-09 bear market, move back in gradually. Lauren Prince, a certified financial planner in New York City, says one of her clients, a 60-year-old widow wanted to go more conservative when the markets plunged more than a year ago. Prince boosted her bond exposure to 85% of her portfolio. Now Prince is easing the woman back into stocks over the next year until she reaches a more appropriate 60% stock-40% bond split. In your final working years, you should have a six-month emergency cash reserve so that you don't have to tap your investments, says Vincent Barbera, a certified financial planner with TGS Financial Advisors, in Radnor, Pa. "Don't fall in love with cash," he says. "You have no hope of achieving your goals if your money is getting eroded by inflation." Take advantage of your last years with a paycheck. Try to contribute the maximum $22,000 a year to your 401(k). Advertisement For retirees 65 to 74. In the early years of your retirement, you should still have 50% to 60% of your portfolio in stocks for growth. But as the years go on, scale back a bit. "When you get older, you don't have time to make up for losses," says Robert Mecca, a certified financial planner in Hoffman Estates, Ill. Mecca recently scaled back stocks to 50%, from 60%, in the portfolio of retirees Terri and Jim Collins, both 68, who live in Schaumburg, Ill. "There was no reason for them to take the risk they were taking," says Mecca. Terri's teacher pension and Jim's Social Security have enabled the couple to defer withdrawals from their IRAs and other investments. Terri says the market volatility is nerve-wracking, but even with half of their investments in stocks, she's confident that the diversified portfolio will carry the couple through turbulent times. "We're in no hurry to take the money out, so we have time to make the money back," she says. When it's time to withdraw, you may be able to ignore market volatility if you go with the "bucket" approach. With this withdrawal strategy, a retiree lives off guaranteed income in the early years and keeps riskier investments in a long-term portfolio. Advertisement The first bucket is a cash reserve to cover one to two years of living expenses. The second bucket would contain conservative income-generating investments such as short-term bonds. Each subsequent bucket would consist of increasingly aggressive investments, entailing more risk but more potential return, such as small-company stocks and international stocks. If a bear market hits, you can live off the first bucket without having to sell longer-term investments. "What kills a portfolio is having to sell assets when they're down," says Doug Orton, assistant vice-president with MFS Investment Management, in Boston. People with a pension are generally in the best shape to withstand market volatility. If you don't have a pension and can't stomach market turbulence, you could take part of your portfolio and buy an immediate fixed annuity to pay for certain fixed expenses. For those 75 and beyond. Retirees in this age group are in the best position to reduce their stock exposure. They're on Social Security, and many are likely to have a pension. These two sources of guaranteed income should cover a significant portion of a retiree's living expenses, especially if the mortgage is paid off. But don't abandon stocks altogether. You can keep your allocation at 20% to 30%. Because your goal at this stage is wealth preservation, opt for dividend-paying stocks, which will produce income. Look for high-quality companies with a history of boosting dividends at least 10% a year. Retirees can take on more risk if they have enough assets to live on and want to leave an inheritance. "Their investment horizon is longer, and they could be more aggressive," says Miccolis. For their bond portfolios, retirees in this age group should be invested in short-term investment-grade corporate bonds or government-backed Ginnie Maes.