IT'S LESS THAN

a month into 2008 and the new year is already proving to be a tricky and scary one for investors. Recession fears have sent the major stock market indexes into a downward spiral, the subprime mess still weighs on the financial and real estate sectors and the Federal Reserve is slashing interest rates in the hope of igniting consumer spending and boosting the overall economy.

With so many factors in play, it's hard to sit back and watch as the market unravels. But before making any rash moves there are some other steps to consider first.

Don't Panic

The Dow Jones Industrial Average is down 8.2% since the beginning of the year and the S&P 500 has plunged 9.4%, but the worst thing an investor could do is panic.

Allowing market swings to dictate your investing behavior is a huge mistake, warns Stuart Ritter, a certified financial planner with T. Rowe Price. Selling at a time when stocks are beaten down guarantees that you'll lock in a loss. Keep in mind that historically, a massive selloff in the stock market means a recovery is to follow, says Danielle Hughes, CEO of New York-based Divine Capital, an institutional broker dealer. While it's impossible to pinpoint when that recovery will occur, long-term investors should have faith that it will eventually, she says.

In the meantime, stick to a long-term investing strategy and consider investing in target-date funds that automatically reallocate your 401(k) investments based on your age, not on market swings.

Lock in CD Rates

The Federal Reserve's 75-basis point rate cut Tuesday should help those who want to borrow money but it's bad news for those trying to save some. That's because the yield consumers get from certificates of deposit, or CDs, and high-yield savings accounts typically move in tandem with interest rates and will reflect a rate cut in a matter of hours or days.

The Fed has already cut rates four times since September and even more cuts are expected. That's why it's imperative to lock in CD rates immediately, says Greg McBride, senior financial analyst at Bankrate.com. "There's no benefit to holding out for a few weeks or months because the yields will only get lower," he says.

Currently, the average rates offered on CDs are 3.32% for a one-year and 3.56% for a five-year, according to

. Rates are higher for the one- and five-year CDs at EverBank in Jacksonville, Fla., where they're 4.5% and 4.64%, respectively.

High-yield savings accounts offer similar rates but carry the added bonus of liquidity, allowing you to gain access to your cash in a pinch. HSBC Direct and Emigrant Direct have a 4.25% and 4.55% interest rate, respectively some of the highest currently available. The downside: It's impossible to lock these rates in.

Reallocate and Diversify

While it's important not to react to every market swing, don't ignore your portfolio entirely.

If you're heavily invested in a risky sector like home builders, then it's time to reallocate some of your holdings into more defensive plays. Health care and consumer staples stocks (such as supermarkets), for example, are better suited to weather volatile markets. "No matter how bad the economy is, people still have to put food on the table [and] buy medicines," says McBride. Last year, health-care companies reported 12% earnings growth while financial-services firms saw earnings dive 31%, according to Lipper.

Another promising sector is technology, which reported the highest earnings growth 14% out of any S&P 500 sector, according to Lipper. Despite those stellar results, these stocks have taken a hit. The tech-heavy Nasdaq Composite is down 12.2% since the beginning of the year. Jeff Tjornehoj, senior research analyst at Lipper, believes the group is due for a rebound. "Tech earnings are forecast to be better than most other sectors for this year," he says. The safest bet is to stick to the blue chips of the tech world like International Business Machines and Microsoft, which have a great deal of international exposure and strong product lines, says Kim Caughey senior equity analyst at the Pittsburgh-based Fort Pitt Capital Group.

Diversity is also a key to surviving down markets. Index mutual funds and exchange-traded funds, for example, offer baskets of securities that track the performance of a stock, bond or commodity index.

"If you're concentrating on energy, and feel that commodities would be a good diversification tool for your portfolio, instead of buying one or two or 10 stocks, it might be much more effective to just buy [a commodity index] ETF," says certified financial planner Sheryl Garrett.