Many investors have been caught in a financial vise in 2001, their portfolios clamped down by a stagnant stock market and a dramatic decline in yields on cash and fixed-income investments.

Most prone to this stuck-in-quicksand feeling are those who sold themselves out of a volatile stock market in 2000 and into short-term investments, such as money market accounts and certificates of deposit.

At the time, CDs and MMAs had a lot going for them -- these safe havens were posting their highest returns in five years. Those same investments now carry the lowest yields, on average, in the past seven years.

So what is an investor to do?

Often, the best course of action is to do nothing.

People sometimes think that somewhere there exists a foolproof way to glide through the gyrations of interest rates, economic cycles and stock market corrections unscathed. Sadly, we are no more likely to uncover such a secret than to find the Fountain of Youth or the pot of gold at the end of the rainbow.

A well-founded long-term investing strategy -- with allocation among and diversification within investment classes -- will carry you through good times and bad to reach long-range objectives. The risk of using short-term thinking with long-term money has the potential to far outweigh the effects of inherent volatility.

A fixed-income investor who moves away from lower-yielding, risk-free investments to pursue higher yields on non-investment grade debt, for example, encounters the far greater risk of principal loss.

Jeopardizing the principal from which the investment income is earned is akin to the farmer betting the farm. Same goes for the 20-, 30-, and 40-somethings bellyaching at the water cooler about their declining 401(k) balances. The risk of investing too conservatively now poses a far greater risk to retirement security than the current market malaise.

The question to ask is whether your portfolio is in mesh with your long-term goals. Proper apportionment among stocks, bonds and cash, and the periodic rebalancing needed to keep this mix intact are vital to weathering market and economic conditions while achieving long-range objectives.

Did the New York Yankees win every game last year? No. But they did achieve the larger goal of winning the World Series.

Just as a championship ball club doesn't jettison a proven lineup of productive players in favor of minor league call-ups amid a losing streak, investors should not dismiss the long-term merits of a properly allocated and well-diversified portfolio amid the inevitable short-lived volatility.

Greg McBride is a financial analyst for Bankrate.com.

-- Posted: July 13, 2001