Think first, adjust your investment portfolio strategy later

— -- If you hear screaming next door, it's not because your neighbors have found Mr. Smith in 47 neatly labeled pickle jars. It's because they've opened their October brokerage statement. It's not going to be pretty.

Eventually, you, too, will peek inside that ominous envelope. Once your head stops rotating, you'll want to do something. But this is a time when you should probably think for a few minutes before buying or selling. Here are a few hints for both.

The Dow Jones industrial average has plunged from an intraday high of 11,022 to an intraday low of 7774 — a swing of nearly 3,250 points. This month alone, excluding today, the Dow has lost 17.1%, putting it on track to be the worst month since October 1987.

On days when the market is behaving like a troll with a hangover, it's hard to react rationally. Your first instinct, in most cases, is hide in the basement. That's fine. Do what you need to do. But if your first instinct is to sell, consider a few points:

•There's nothing horrible about selling. In fact, if you have stock investments in a taxable account, you can get a decent tax break for selling before Dec. 31. You can use your losses — short-term or long-term — to offset any amount of gains you might have. You can then deduct $3,000 of any additional losses from your income and carry any remaining losses to the 2009 tax year.

For example, if you have $10,000 in losses and $1,500 in gains, you could use your losses to offset your gains, deduct $3,000 in losses from your income, and carry forward $5,500 in losses to the 2009 tax year.

If you wait at least 30 days, you can buy the same securities back. If you don't, you'll have a wash sale, and the IRS will disallow your tax losses.

•That said, selling is best done in tranquility. Don't do it when traders are behaving like a giant tentacle beast using the Big Board as a smorgasbord. Start by asking: When did I plan on using this money? If you were saving for a goal 10 years or more away, you just hang on. A broadly diversified mutual fund will probably recoup your losses faster than a money fund. After all, the average money market fund now yields 1.5%, iMoneyNet says. At that rate, you'll double your money in 48 years.

•If you're investing in a mutual fund, don't sell in the morning. There's really no point. You'll get the fund's price at the market's close no matter when you sell. Let's say you wake up and the Dow is down 500 points. By lunchtime, the Dow could be up 700. Because the market's so volatile, you should wait until at least 3 p.m. ET to place your order. Don't wait too long: If you sell after 3:30 p.m., your order might not be filled in time.

•Consider rebalancing instead. Rebalancing means that you set a target for the different asset classes in your portfolio — say, 40% bonds and 60% stocks. If your portfolio strays too far from those limits, you sell some of your winning investment and reinvest it in your losing one to bring the portfolio to a 60/40 split.

Stocks and bonds often move in opposite directions, so you shouldn't have to rebalance often. We looked at monthly returns from the Lipper large company core fund index and the Lipper general government securities fund index. We assumed an investor wanted 60% in stocks and 40% in bonds. If he rebalanced whenever the portfolio was 5 percentage points out of whack, he would have rebalanced three times in the past 10 years.

Rebalancing would have modestly improved his performance. More important, it would have reduced the overall volatility of his portfolio.

What if you're seized by a temporary fit of madness and decide to buy? For example, suppose the Dow plunges 1,000 points on rumors of bank failures, oil shortages and an invasion of the living dead. You think to yourself, why not try to pick up a stock on the cheap?

This isn't an entirely bad idea. If you put in a market order for 100 shares of Unmitigated Horror, however, you'll get whatever price the stock is going for at the moment. If you put in your order in midfall, however, you could buy Unmitigated Horror at $15 and still see it end the day at $14.50.

Instead, consider putting in a limit order for a price that's 4% or 5% below the current level. With a limit order, you specify the price at which you want to buy — say, $14.60. Your broker won't execute the order above that price. You might not get the stock at the price you want — but if you do, you could get a bargain. (Oil stocks have been particularly hard hit lately: The stocks in the chart might be appealing in the next plunge.)

And in an uncertain market like this, throwing all your cash in at once could lead to terrible, horrible things. Add a bit each week. Sooner or later, you'll invest at the bottom.

John Waggoner is a personal finance columnist for USA TODAY. His Investing column appears Fridays. new book, Bailout: What the Rescue of Bear Stearns and the Credit Crisis Mean for Your Investments, is available through John Wiley & Sons. Click here for an index of Investing columns. His e-mail is