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In September 2006, the Dow Jones Industrial Average climbed to within a few points of its record high. Five months later, on Feb. 27, 2007, the blue-chip indicator took a 3.3 percent hit in a single day, falling 416 points amid reports of a mini-collapse in the Chinese market. On that same tumultuous day, the larger Standard & Poor’s 500 index suffered a similar fate, falling 3.5 percent and losing $452 billion in market value.

Did your entire portfolio go along for the ride?

When the market is bullish, many investors buy more equities, hoping their performance will follow the Dow, S&P 500 or other U.S. market indexes. But when prices slide, investors are tempted to head for the door, shedding their shares of stocks or stock funds. Experts advise against both temptations.

Follow a plan

Instead of attempting to mimic these two major stock market indexes — both the Dow and S&P 500 focus solely on large U.S. companies — developing a broad-based plan and sticking to it are what financial professionals recommend.

For most people, that means creating a diversified portfolio of equities, bonds and cash. Doing so will reduce your likelihood of experiencing severe declines on bad days and during extended bear markets. "When you have a day like [Feb. 27, 2007], you take a small hit, but not the 3 percent or 4 percent market hit," says Thomas Belisari, a Pennsylvania-based financial planner.

Just because your portfolio is diversified does not mean you will never take a large hit. It depends on how diversified you are and how far the overall market falls.

The mix of equities, bonds and cash in your portfolio will vary depending on your age, goals and risk tolerance. For example, a 30-year-old investor with minimal savings and a high risk tolerance is more likely to have a higher percentage of equities in his or her portfolio than a 55 year old who has been investing for decades and wants to retire in a few years.

Develop a sound investment strategy

Experts recommend the following components when developing an investment strategy.

Diversify your portfolio. Equities, bonds and cash are the three main types of investments. If all your equities are from one type of company in a single country, your portfolio has a higher level of risk than someone who buys a variety of investments. A more stable mix includes U.S. large-, medium- and small-cap funds; European funds; and emerging market funds.

"When looking at what you want in your portfolio, you want things that react differently to the same piece of information," Belisari says. "You don’t want it all to react all one way or all the other way. That helps diversify your risk."

Owning some international stocks or stock funds — along with a mix of less risky investments such as corporate and government bond funds — can be smart. But don’t let any single piece of advice convince you to act. Talk to your financial professional and discover what’s right for you and your goals.

Monitor your portfolio. While it’s a bad idea to continually tinker with your portfolio as the market fluctuates, it’s also hazardous to keep your portfolio on autopilot for years. Once you determine the mix of equities, bonds, cash and other investments that is right for you, examine your holdings at least once every year. You’ll notice the investments changed at different rates during the past 12 months. If your allocation has fluctuated significantly, or if your goals have changed, you may wish to rebalance your holdings to restore a desired mix.

Know your risk tolerance. Did your heart sink when the high-tech boom bottomed out in the late 1990s? Did you unload your emerging market fund when the Chinese market went south in February? If so, you may have a lower tolerance for risk. Money managers often give new clients questionnaires to determine their risk tolerance. These can be good tools for initiating a discussion about the appropriate mix of investments in a portfolio. Even if you tolerate risk well, it doesn’t always make sense to buy more equities. For example, high-net-worth individuals nearing retirement probably shouldn’t jeopardize their wealth by taking too many chances.

Save, save, save. This might seem obvious, but financial planners say they can’t emphasize it enough. Steadily saving a percentage of your income over a period of time is one of the keys to financial stability. Don’t wait until you’ve paid for your children’s education or completed your list of home remodeling projects; save early and regularly.

Watch expenses. In addition to researching underlying investments when making portfolio decisions, investors also need to consider the fees that brokers and financial advisors charge for portfolio management. These expenses sometimes reach as high as 6 percent, meaning the investments really need to outperform lower-cost alternatives.

Many mutual funds carry lower management fees. Expense ratios range from a low of 0.2 percent (primarily for index funds) to a high of 2 percent or more. The average domestic equity mutual fund charges about 1.4 percent; the average fixed-income fund charges about 1.1 percent; and the average international fund has a higher expense ratio, at about 1.9 percent, according to SmartMoney.

Controlling costs is smart, says Charles Stanley, a LaJolla, Calif.-based financial planner. With low-cost funds, "you’re keeping money in your pocket, which can be a whole lot of savings over a long period of time," he says.

Limit taxes. If you invest most of your retirement savings in non-401(k) accounts that are subject to taxation, you might want to consider tax-managed mutual funds. While most mutual funds aim to generate as much return as possible (within their defined parameters), tax-managed funds seek to minimize taxes while also creating wealth.

Accept a certain degree of uncertainty

So, how will the markets perform in the next year?

When clients ask that question, financial planners often take a deep breath before answering. "I don’t have next week’s newspaper," Stanley says.

Worrying about an uncertain future can paralyze investors into inaction — which may not be productive. Instead, most planners recommend investors focus on factors they can control, such as their personal savings rate, risk exposure, cost control and taxes, and leave the Dow and S&P 500 for prognosticators to discuss.