All types of investments involve risk

A year ago, investors got a jolt. Over the course of one week, the debt ceiling agreement in Congress went to the brink, and within days, Standard & Poor's downgraded U.S. debt from AAA to AA+. The reaction was swift: U.S. stocks fell 14 percent in a matter of weeks as markets teetered.

Looking back on that period, there are a number of lessons to be learned, the most important of which is a not-so-gentle reminder of what being an investor really means.

Everything you do in the world of investing has some component of risk. There's general investment risk, i.e. the risk of losing money on something you purchase; interest-rate risk, which is the risk that the value of a security will go down because of changes in general interest rates; and inflation risk, which is the risk that increases in the prices of goods and services will cause a reduction in your purchasing power.

There are other types of risk, including currency and sociopolitical, but none may be as scary to retirees or nearretirees as liquidity risk, or the risk that you might not be able to convert an asset into cash quickly. I recall many people who claimed that their retirement plan was simple: "Sell my house, downsize and keep all of the equity to fund my needs." As we know, that strategy did not work out exactly as planned.

Even so, the granddaddy of them all may be the risk of your emotions taking over your investment and retirement plans. Over the past four years, many investors have been spooked by markets and reactively yanked money from their accounts. As a result, some missed the big bounce back from the financial crisis lows. After panic selling ensued in 2008-2009, stocks roared back while countless investors stood on the sidelines. If you were shaken out of the stock market due to the debt ceiling mess and the credit downgrade, you missed a subsequent rise of 7 percent in U.S. stocks over their pre-downgrade levels.

Maybe some of these investors never should have been in the market to begin with -- if that's the case, the meltdown was a painful lesson, but one worth heeding. If the swings are too wild and the ride jarring enough to cause sleepless nights, perhaps being a stock market investor is not for you.

But I suspect t there are too many people who find themselves whipsawed by the two diametrically opposing investment forces: fear and greed. You know the drill: The market tanks; you sell. Only when the market rises do you feel a false sense of security and buy, which is when the market will most likely tumble once again.

Here are some techniques to help you break that cycle of buying high/selling low:

Create a game plan and take a risk-assessment quiz. Most retirement plans have online risk tests, and most advisers and brokers will encourage you to take one.

Invest in a diversified portfolio that is based on the outcome of the risk quiz. From 2000 to 2009, a diversified portfolio of stocks and bonds beat a riskier portfolio of 100 percent stocks. And I bet those diversified folks slept better, too.

Put your portfolio on autopilot. Once you have an allocation, rebalance it (quarterly or semi-annually). So, if your goal is to have 50 percent stocks and 50 percent bonds, and market moves result in your allocation shifting to 60 percent stocks and 40 percent bonds, you need to sell stocks and buy bonds. This action can often force you to sell high and buy low, the opposite of the fear-greed cycle. Many employer-based retirement plans have an option to auto-rebalance.

Keep ample liquidity. If you have a big expense coming up, set money aside to cover it. If you are in or nearing retirement, keep one to two years of living expenses set aside to avoid selling in a down market just to maintain your lifestyle.

All in all, how we react to big swings in the market can tell us a lot about what kind of investors we really are.

Jill Schlesinger is the editor at large for CBSMoneyWatch.com and writes this column for Tribune Media Services.