Three reasons why you shouldn't panic and sell your stocks

The government bailout that was supposed to save the financial sector from certain doom failed to pass vote on Congress. Does that mean we now face certain doom? I think not.

I don't want to sound Pollyanna-ish and I don't really have a crystal ball (as my headline promises), but here are some reasons why investors should not panic and sell their stocks now:

First, as frightening as the market looks -- the Dow fell 778 points for its worst one-day drop ever -- there is going to be a rebound.
If you sell at the bottom, you will miss out on an eventual recovery. If you really want to get out, wait for a bounce and then sell some of your stock holdings. Don't sell into a freefall. Think about it: the S&P fell an astounding 8.79% on Monday -- the worst percentage drop in more than 60 years, except for 1987's Black Monday crash. The Nasdaq fell 9.14%. Given the devastation, I think a bounce could come as soon as Tuesday since there will no doubt be some news that has to be better than Monday's.

Incidentally, this "don't sell in a panic" advice is the same you'll get from any financial advisor worth his or her salt. If you're invested in the market for the long term, you should ride out such waves and -- if you're really brave -- even use episodes of panic selling to buy more stocks.

Second, a private sector solution to this problem is possible.
We've seen Warren Buffett invest $5 billion of his capital into Goldman Sachs and stronger financial institutions step in to buy the weak. There is plenty of additional capital out there that could come in and boost the banks. Heck, Barron's just ran a cover story about how profitable the government's purchase of toxic waste would ultimately prove. If the magazine is right, some of those hedge funds will surely come in and slurp up some of this slop.

What if a private sector solution doesn't materialize? Then you should be glad that the bailout plan on the table Monday didn't pass. It could be a sign that the U.S. might well have been just throwing good money after bad by buying all those billions of bad debt.

Third, If credit markets stay frozen and banks keep going bust, I think Congress will pass some kind of Federal aid package that will stabilize the financial system.
It may take a few painful weeks of market turmoil and economic hand-wringing, but hopefully it will be better than the package that failed to pass the House today.

There are plenty of other options for how such a bailout could be structured -- such as the government getting preferred stock in exchange for injecting capital, or the Feds finding a way to provide a more direct boost to the long-suffering housing market. A lot of folks are going to be fighting it out to come up with a plan that will both work and pass and I think they will succeed.