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In recent weeks, the stock market has dropped nearly 10 percent. How should investors respond? Two financial experts offer insight.

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PHIL PONCE: There was some relief today, but in recent weeks the market has dropped almost 10 percent, and many individual investors may be wondering how to respond. Two views now: Ric Edelman is chairman of Edelman Financial Services, an investment management firm. He's the author of "New Rules of Money." And Terry Savage writes a syndicated personal finance column for the Chicago Sun-Times. She's written several books on personal financial strategies. And welcome both. Ric Edelman, what advice are you giving investors as to what they should keep in mind as all this is playing out?

RIC EDELMAN, Author/Investment Manager: More than anything else, you have to focus on your long-term goals, why did you invest in stocks in the first place. If it's for college planning for a child or your own retirement planning, stay focused on that. What happened today happens, and we have to recognize that along the path to our future goals.

PHIL PONCE: Terry Savage, what are you telling people?

TERRY SAVAGE, Chicago Sun-Times: Well, I think a lot of people are waiting for someone to ring a bell or give a definitive answer: This is the end of the bull market, or it's going to continue. And of course no one can do that. But I also think a lot of people don't get the larger picture, the fact that there have been many long periods when markets either declined for a few years sharply, or stayed at very low levels compared to previous levels over a period of nine to ten years. Take the 70's-from a high of 1000 in 1969 and a low in 1974 of about 570-the Dow stayed under 1000 until 1982. So when you think about your long-term goals, you also have to think about your short-term emotion and how you'd react if, indeed, we did hit another one of those periods where it was either extremely scary in the short run, or extremely boring, but declining in the long run.

PHIL PONCE: And Terry Savage, following up on your statement about emotions, have people gotten into the habit of opening up their statements from their 401-K's and seeing nice increases, and what's going to happen now?

TERRY SAVAGE: It's very rewarding to see your retirement plan grow. And as a result, many Americans have simply stopped saving. It's ironic. I'm here in Phoenix today because I'm doing a program around the country called "Money 101" to persuade people that they have to get out of debt-so many people declaring bankruptcy instead of coming in ahead of the game in their retirement account. So there are people falling behind who don't know a thing about the stock market and people who are complacent because they think the stock market is guaranteed to replace any other form of investment or savings. And that's a little bit scary.

PHIL PONCE: Ric Edelman, are people getting complacent?

RIC EDELMAN: Absolutely. We are getting spoiled. Most people have only been investing in the last ten or fifteen years. That's their sum total of investment experience. Well, if you'd started your investing post 1982, as Terry mentioned, then you'd know nothing but up-side volatility. The notion of down-side volatility is a foreign subject. Oh, we saw it briefly in '87 and '89, a little bit in '94, but we don't really know what a bear market is like. Most professional money managers are too young to remember the bear market of the 1970's. And, as a result, we can be spoiled into thinking that 20 percent returns are normal, when, in reality, they are historically unprecedented.

PHIL PONCE: Ric Edelman, one of the things that one often hears about investment strategies is to make sure there's a balance, to make sure it's diversified. How do you know if you have the right mix?

RIC EDELMAN: We see so often what I refer to as a barbell approach. People have a lot of money in cash; they have a lot of money in stocks; and nothing in-between. Stocks are only one of the nine major asset classes that exist. You've got government securities and bonds, real estate gold, international securities, a wide variety of investment opportunities, and most folks figure they own five mutual funds, therefore, they are diversified, when, in reality, they really have one mutual fund five times. They have five different stock funds or five different bond funds. They are not diversified at all. They are redundant. The best way to tell, Phil, whether or not you have the right diversification is to look at the annual report of your mutual fund. It will show you specifically how the fund is invested and is a very good tool to figure out if you're as diversified as you really think you are.

PHIL PONCE: Terry Savage, any tips on diversification?

TERRY SAVAGE: Well, I want to warn people if you are invested in a mutual fund, really, people have come up to me and said, well, I'm not too worried about the stock market, I'm in a mutual fund; they think that sort of gives them immunity. But your fund manager is paid to be fully invested, and most of them are very fully invested in the stocks described in the fund's title and prospectus. So they're not going to sell. They're not going to protect you. It's your decision to make if you feel you're too fully invested in the stock market. Your mutual fund will go down when the market goes down, so you need to make some adjustments and maybe not be in mutual funds to that great extent, or in your retirement plan, to choose some of the more conservative options, especially as you near retirement, when you won't be continuing to contribute and you won't get the advantage of lower prices, of continuing to put money in, that's when you want to be a little bit more conservative.

PHIL PONCE: But Terry Savage, you talk about how it's up to the individual to be responsible for his or her own spread. Do people really have the information or the knowledge to make those decisions in a smart way?

TERRY SAVAGE: I think people think stocks are something special, but let me give you an example. Suppose wherever you are in your town you know a business person who makes maybe a good living, $250,000 a year, runs a small business. If you walked up to that person and said I'll tell you what I want to do, I want to buy your business and I will give you today the next 90 years of earnings, say about $22 million, you know that business person would sell out. Well, you know, that the NASDAQ minus the top four stocks is selling at 90 times earnings. That's an awfully rich price to pay. You'd be the seller of the business at those prices. Why are you being the buyer? Think of stocks in terms of real life, because that's what they represent, real business values, or not a lot of values.

PHIL PONCE: How about it Ric, are there a lot of people out there who really don't know what they're doing?

RIC EDELMAN: Most. And that's part of the problem. There's good news and bad news to the scenario. The goods news is information has never been more widely available. There are radio and TV shows devoted to it-lots of books that Terry and I have both written and many others-Internet access to information has never been more widely available. Unfortunately, there's also a lot of financial noise out there, information or in many cases misinformation that is designed to serve the sellers' goals, as opposed to yours. Just because they manufacture a mutual fund doesn't mean that you ought to be buying that product. So we have to learn as consumers how to separate the information that is helpful to me from the noise that simply interferes with what I'm trying to accomplish. And that is something, unfortunately, that most consumers on their own, without any outside help, are ill-equipped to handle.

PHIL PONCE: Terry Savage, Ric Edelman talks about this noise, this constant barrage of financial information. Is that in some way perhaps making people more conscious of the short-term, as opposed to the long-term?

TERRY SAVAGE: I think people are conscious of the short term, but they don't always look behind the headlines. The noise can be very loud. Headlines, for instance, way up until a couple of days ago, the noise was bull markets continue. But do you know for the first six months of this year, Phil, only 17 percent of all the stock market mutual funds out there beat the Standard & Poor 500 average? So, in fact, many people didn't come anywhere near having a bull market. There's statistics that show that 24 percent-even before yesterday-24 percent of the stocks on the New York Stock Exchange are down 52 percent from their highs. So a lot of stocks out there are in their own bull market. And people need to say, wait a minute, it's not the headline noise that I want to know, it's what's happening to my portfolio? You just got your six months statement. Take a look and see what you really own and how the performance has really been.

PHIL PONCE: So Ric Edelman, bottom line, are you saying people should just, what, sit tight, ride this out, particularly if they have some time before retirement?

RIC EDELMAN: On the assumption, yes, on the key assumption that you have at least 10 years to go before you're going to achieve your goal, getting to retirement or getting your child in college, then, yes, sit tight, again, on the assumption that you are properly invested in the first place. If you are, this is no big deal, but if you are not, if you're too close to retirement, or if you need the money sooner or if you just can't stomach the volatility, then this is a great time to re-evaluate what in the world you're doing in the first place.

PHIL PONCE: Terry Savage, is there a danger? I mean, some people feel the impulse when they see the stock market going down to sell, and is that something that you're concerned about?

TERRY SAVAGE: Phil, there's an old maxim in the stock market. It is sell down to the sleeping point. If you have enough other investments--cash or real estate-things aside from your stock market investments, and you can sleep well at night, even through a market decline, then you're okay. That sleeping point is different for every person. But you have to take into account the possibility that we haven't ruled out fair markets. Don't think about 1929. Just think of Japan in the last decade. They were-their stock market was near 40,000. Today it's 15,000. Japan continues. People there live, but they've seen a lot of their investment money melt away, and they're scared to go back in. And the same thing-I'm not saying could happen here-but the same thing is a kind of prospect you have to think about. How would I react--because the worst thing is to panic when it's really down there, and that's what always makes the bottoms in bear markets. Think now before-well, we're relatively near the highs-don't forget.

PHIL PONCE: Ric Edelman, have you seen any evidence of panic among the people you encounter, individual investors?

RIC EDELMAN: Not yet. We manage more money and handle more clients than most financial planning firms in the nation, and we have seen a lot of complacency, and, if anything, they're wanting to add money to their accounts. We're counseling against that too. What's going on right now should not encourage you to change your strategy; you should simply stick with it. And if you are thinking of selling in this market, to echo the sentiment that Terry mentioned, people who sell in an environment like this tend to return stocks to their rightful owners.

PHIL PONCE: Ric Edelman and Terry Savage, thank you both very much.

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