This week, the government released the terms of its Capital Assessment Program for banks – also known as the stress test. The tests are designed to analyze banks’ financial health, and quell investors’ fears that the banking system is on the verge of collapse.

Whether these tests will truly scrutinize the mass of numbers and so-called “toxic assets” on banks’ balance sheets remains to be seen.

Right now, many banks would surely get a big, fat “F” – for failure.

And if my recent conversations with friends, former colleagues, and contacts in the business world are a good gauge, ordinary Americans are failing their own “stress tests,” too.

I’m not talking about the kind of test where they hook you up to a heart monitor and you run on a treadmill, but rather a financial stress test. Are you passing the test?

Had Some Bad Luck? Don’t Turn To The Stock Market For A Financial Bailout

Some friends of mine, who unfortunately became unemployed recently, are now trying to make up for the lost paycheck by taking on additional investment risk in their portfolios. And while the motive is understandable, it could have disastrous results.

Simply put, if you want to suffer certain losses, just trade because you have to, not because it makes any sense.

The pressure of having to put food on the table will lead to unwise choices like neglecting investment discipline and selling winners too soon.

If This Sounds Like You, Stop Investing Now

For example, one guy I know loaded up on financial stocks in December and lost his shirt. He felt so desperate to try to reach his magic monthly number that he took on way too much risk.

He did the same thing again last night, adding Bank of America (NYSE: BAC), Morgan Stanley (NYSE: MS) and Goldman Sachs (NYSE: GS) to his portfolio. The move thankfully paid off for him this morning, but had the trade gone against him, he would likely have been in a world of hurt.

Of course, not everyone is trading to replace a lost paycheck. Some have merely become more active in an attempt to gain back the 50% or so that they’ve lost in their investment or retirement accounts.

Now, as someone who writes for investment newsletters and trading services for a living, I’m probably not doing myself any favors with the following advice: If you recognize yourself in the above descriptions, stop trading!

Three Steps To Handle The Stock Market’s Stress Test

Don’t get me wrong: Investing can be a lot of fun. But you need to do it with a cool head and sensible motives. When investors are emotional or stressed out, one a bad trade can have a domino effect and cascade into numerous losses, as emotions take over and cloud judgment even further in trying to make up for losses.

Right now, many investors are feeling overwhelmed and frightened, wondering if they’ll ever get their nest eggs back.

It’s important not to do anything rash.

~ Don’t pull all of your money out of the markets. Mutual fund industry research has shown that investors typically withdraw their money from funds at precisely the wrong time.

~ Stick with people you trust. If you’ve worked with a financial advisor, newsletter, or investment program for a while, stay the course if they’ve produced results in the past.

~ If you’ve been managing your own money and now feel like you need some help, check out the range of investment services that the Smart Profits Report team produces. We’ve designed our portfolio of products to meet the needs of just about any investor and their own personal portfolio choices.

In addition, check out my colleague Alex Green’s book, The Gone Fishin’ Portfolio. He outlines exactly how you should allocate assets in your portfolio to give you the greatest chance of solid returns with less volatility. He also gives a method that shows you the least expensive way to invest. Keep in mind, this is for your long-term money.

The Smart Profits Bottom Line

Again, if you want to make money in this stock market, remember that you need to do it because you want to rather than because you have to. This is a nerve-wracking time and I’d hate to see anyone need an actual stress test caused by ill-judged overtrading.

And I’ll leave you with this positive nugget: We’re probably not too far away from what could be the greatest buying opportunity of our lifetimes. Be sure that you’re in a position to take advantage of it by not panicking and losing your capital now because you’re grasping for trades in order to make up for previous losses.

Hoping your long go up and your shorts go down.

Source: Can You Pass The Stock Market’s “Stress Test?” These Three Steps Will Help