Repairing your portfolio may depend upon your tolerance for risk

— -- Q: My portfolio is still very damaged by the bear market, even though it has come back a bit this year. What's the best way to repair it?

A: Stocks have enjoyed a strong 40% bounce from the March lows, and many investors, like you, are still disappointed.

It might seem strange to enjoy a return in just five months that's four times greater than the market's historical average annual return. But the reason is simple. Despite the seemingly impressive recovery, it's still a far cry from what's needed to bring most investors back to break even.

But don't think it's just you. Consider the Wilshire 5000 index, which is a broad measure of the market's overall value. The Wilshire 5000, through mid August, was up 47.1% from its March 9, 2009 low. That generated $3.9 trillion in paper profits for investors. However, despite that rally, investors are still well into the red. The Wilshire 5000 is still down 36.2%, or $7.1 trillion, from its Oct. 9, 2007 high.

So the first thing to do is to stop thinking you're the only one down. Anyone who was exposed to the U.S. stock market, which is just about anyone with any investments, is down, too.

How to repair the damage is a trickier question. The answer really depends on you, your stage of life and your appetite for risk. If you're a 20-something new in a job and starting out, then you don't have much to worry about. With a reasonably balanced portfolio, you can probably expect average annual returns of about 10% or so. At that pace, you'll be back whole in less than four years.

If you're older or cannot stomach as much risk, unfortunately, your recovery period will likely be much longer. You must recognize that while the bear market that began in 2007 was historic, history is meant to be broken. That means if you rush into risky stocks trying to win back your losses, you could easily be making things even worse if things go against you.

This may seem counterintuitive, but to start the repair process, you may need to ratchet down your exposure to risk. Less risk may prolong the time it takes for you to recover, but also reduce your odds of suffering another brutal decline.