If you can patiently ride out the down periods, there is much convincing history that stocks will eventually recover and go on to post gains that outpace what you can earn from investing in bonds or by keeping all your money in cash. But you must have at least 10 years, preferably longer, before you intend to touch that money.
If you do have time on your side, you can get great deals on stocks right now. At today's lower prices, your money buys more shares than it did a year ago, when prices were 30 to 40 percent higher. And more shares is the goal. Don't worry about current market values—you want to scoop up as many shares today as possible; the more shares you have, the more you will make when stocks rise. I am in no way suggesting that may happen over the next year, or two, or three. What you care about is 10, 20, 30 years down the line.
I recommend sticking with exchange-traded funds (ETFs) or low-cost no-load mutual funds; you make one investment that comprises dozens of underlying companies. That's what is called diversification, and it is a vitally important way to lower your risk. I like the Vanguard Total Stock Market ETF (VTI) or its mutual fund cousin, Vanguard Total Stock Market Index Fund (VTSMX); both invest in a broad swath of American companies. You might also invest 10 percent of your money in an international ETF, such as iShares MSCI EAFE Index Fund, which holds hundreds of stocks from established companies in Europe, Australia, and the Far East. Much of the world's economic growth occurs outside the United States, so you want to have a portion of your money invested in those sectors.