These are scary times indeed.

The stock market has fallen almost 10 percent in the past four weeks. Some hedge funds are halting customer withdrawals. Many lenders are refusing to make jumbo home loans. The nation's largest residential mortgage company, Countrywide Financial, needed an $11.5 billion emergency loan to stay afloat.

Given all this turmoil, what should investors do?

"Go and garden," says Patrick Geddes, chief investment officer of Aperio Group, which manages tax-efficient index funds.

"If all of your money is in the stock market, and you can't take this, you shouldn't have been there in the first place," he says.

The reason stocks deliver higher long-term returns than bonds or money market funds is because they're riskier or more volatile. "The market pays you for the strength of your stomach lining," Geddes says.

If people "are overexposed in wild stuff they don't understand," this would be a good time to get out, he says. "But if your entire assets are in a target-date retirement fund, my advice is - very strongly - cover your ears and stop reading the value on your statement."

If you have a long-term plan that fits your investment horizon and risk tolerance, a drop of this magnitude is no reason to change course.

The Dow Jones industrial average and the Standard & Poor's 500 index have tumbled 8 and 9 percent, respectively, since hitting all-time closing highs on July 19. Year to date, however, the Dow is up 3 percent, and the S&P 500 is down half a percentage point.

I'm not suggesting the market can't fall further. There are legitimate fears that the credit problems that started in subprime mortgages and have spread to the commercial paper and other debt markets could cause an economic slowdown or even recession.

"We think the odds favor a recession in the future for the U.S.," says Matt Paschke, portfolio manager with the Leuthold Group, which advised its institutional clients to sharply cut their stock holdings on July 17.

"The credit markets partied for four years. You can't go binge drinking for four years and not have a hangover," Paschke says.

Even if there's no recession, tighter credit could put a damper on debt-financed corporate takeovers and share repurchases. Takeovers and stock buybacks helped propel the market to new highs this year by reducing the supply of shares and stoking speculation. Take that away, and the market could struggle.

On the other hand, if the credit crisis is short-lived, investors could refocus on the economy's underlying strength, and the markets could snap back.

The problem is, nobody knows what will happen.

"The concept of market timing - getting out of the way of a speeding train and getting back in when the risks have gone away - is really an illusion. You have to make so many moves right to profit from that, it's just not possible," says Mike Fitzhugh, a principal with Kochis Fitz.

The problem with market timing is that "strongly positive returns have been unpredictable, often coming right after the worst period," says Jason Thomas, Kochis Fitz's chief investment officer. "Further, an outsized portion of total returns come in just a few trading days."

For example, if you had invested $1,000 in the S&P 500 index in January 1970 and stayed put through the end of 2006, you'd have $51,315.

If you had missed the single best day - Oct. 21, 1987, two days after the Black Monday market crash - you would have only $50,737. If you missed the best month (October 1974) you'd have only $44,017, Thomas says.

If you had missed the 25 best nonconsecutive trading days, you'd have only $16,841.

Individual investors often let their emotions rule. They get into stocks near peaks and out following big declines.

This time has been no exception. From Aug. 9 to 15, investors withdrew $12.8 billion more from retail mutual funds than they put in, according to an estimate by TrimTabs.

This is the biggest net redemption since the week after the 9/11 attacks, when investors withdrew $16 billion more than they put in, says TrimTabs.

One thing investors can do to take advantage of the market's big drop - without missing a big upturn - is what's known as tax-loss harvesting.

This involves selling stocks or mutual funds in which you have a loss and buying a very similar stock or fund for at least 30 days. The sale generates a loss that reduces your taxes, within limits. However, the proceeds cannot be invested in substantially the same security within 30 days or it will be deemed a wash sale, and you will forfeit the tax loss.

After 30 days, you can sell the replacement stock or fund and reinvest the proceeds in the original security.

This can only be done in taxable accounts, not in Individual Retirement Accounts, 401(k) plans or other tax-deferred accounts. It would be best to consult a tax adviser.

Kochis Fitz, Aperio Group and other money managers routinely do this for their clients when their losses get big enough.

The loss should be substantial enough to cover all of the trading commissions and compensate for the risk that the replacement security will not do as well as the original one. Avoid doing it with mutual funds that charge sales commission or loads.

Kochis Fitz generally harvests losses when they reach 5 percent in U.S. stocks, 7 percent in emerging market stocks and 10 percent in commodities.

"For tax-loss harvesting in U.S. small cap stocks, we replace our preferred fund - DFA's Tax Managed U.S. Small Cap - with the iShares Russell 2000 index exchange-traded fund," Thomas says.

An S&P 500 index fund could be replaced with a total stock market fund or a Russell 1000 fund, which would give you similar but not identical returns.

Net Worth runs Tuesdays, Thursdays and Sundays. E-mail Kathleen Pender at [email protected].