Five Ways to Play the Stock Market's Wild Ride

Wall Street is in perpetual turmoil. Investors don't have to be.

Sound strategies capitalize on periods of panic, and while much of the country is flustered over what to think of the banking bailout and its accompanying chaos, investment advisers are crafting plans to get through.

We spoke to some of them and came up with this list of 5 strategies to get through the credit crisis.

Out of Cash, Into Stocks

In an intensely volatile environment, the instincts of many investors is to play it safe.

Prices for government debt have risen sharply, with short-term Treasury bills in such demand that they briefly charted into negative returns. Cash yields overall are paltry, but some figure that it's better to protect principle than risk losing everything in the rocky equities market.

That's exactly the wrong kind of thinking, investment pros say.

Get 'em while they're cheap is the attitude of many advisors, who say moves like the 777-point drop in the Dow on Monday should be treated as buying opportunities.

"For the long-term investors this is something that you weather, and you'll be pleased at the end that you didn't overreact and go to cash and go to safety," says Jonathan Scheid, chief investment officer at Bellatore. "If you got out (of stocks) two days ago you missed yesterday and you're probably trying to figure out where to get back in. Sitting on the sidelines isn't an option when the market is this volatile."

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Scheid favors small companies and looks for value rather than growth.

"They've been the ones probably punished more," he says. "They'll recover faster with more return on the upside. Historically we don't expect anything to change on that front."

Go With What You Know

In troubled times, the companies with the strongest foundations are the ones that are going to survive.

Advisers are gravitating back toward the Wall Street stalwarts and the time-tested bluechips to shore up their portfolios.

"Don't do anything rash right now," Knight Kiplinger, editor in chief of Kiplinger's Personal Finance, said on CNBC. "Don't dump good stocks that have been unfavorably tarred with the same gooey brush as bad stocks."

Kiplinger favors solid Dow components Johnson & Johnson and Procter & Gamble , as well as solid banks without significant exposure to subprime loans. See Kiplinger's full comments in video at left.

Along the same lines, focus your approach more on individual stocks you trust rather than trying fill up your basket with a variety of names.

"I'd rather zero in on those specific companies out there that have strong balance sheets, that actually have real cash and don't have tons of debt," says Bruce Fenton, president of Atlantic Financial. "When you're closer to your money, there's less likelihood of strange things happening."

Find Some Funds

For Scheid, using creative instruments like structured products with a guaranteed floor, such as a combination of zero-coupon bonds and derivatives, build in loss limits but also offer upside potential. Deutsche Bank and Goldman Sachs offer the instruments that are generally available through advisers.

He's also using broad-based equity funds, including the Absolute Strategies Fund , which invests in a diverse array of domestic and international companies and a slew of other areas to give investors total exposure.

And he believes oil has some upside potential after surrendering more than 33 percent of the gains it achieved in its record run-up. The Goldman Sachs iPath S&P Oil Total Return Index fund is one way to play the oil move.

"If you're bullish on the future, it's a great time to take money out of fixed income and put it into equity positions," Schei says. "I also think it's a great time to get more diversified."

Reassess, Rebalance, Risk

Generally speaking, now's the time for investors to get a handle on what they're doing and why they're doing it.

As the slide in equity values has caused a natural portfolio rebalancing, people need to know how much more risk they're willing to take on.

Investors with less risk tolerance will want to rebalance their portfolios to make sure they are reflective of their risk tolerance.

Scheid also is telling clients to take tax losses where appropriate with companies that look to have little chance of a substantial rebound.

"Now that we're actually experiencing risk, we ask how it feels, what has it meant to you, what are your views on the future about risk," Scheid says. "If this was unsettling, it could happen again."

Investors should employ a dollar-cost averaging strategy that calls for investing the same amount of money over time to take advantage of gains and losses in share prices.

"You might be kicking yourself in three months from now" if you don't buy, Scheid says. "That's why I think dollar-cost averaging in has its advantages."

Know the Score

Investors also should be paying attention to what's happening on Wall Street as rules change regarding short-selling and accounting and as the government enacts measures to inject liquidity and save the banking system.

"It's important for people to be aware of what's going on and try to get an understanding of it," Fenton says. "That's not always easy. (The bailout is) one of the more important issues that people are going to face. I urge people to get involved with politics and call members of Congress.

"Normally politics and financial planning don't intersect that often. Right now today, decisions are being made that are going to affect the whole world and certain affect regular Americans very profoundly."

Kiplinger, noting the "hunger and thirst for information," also is counseling investors to use the events to their advantage.

"In general, the foundations of future fortunes are laid in bear markets," he said. "When other people panic and dump good stocks, it's a buying opportunity."

© 2009 CNBC.com