Let's assume you own $50,000 worth of stock in an S&P 500 index fund -- as it was valued this morning -- and that you purchased these shares in 2005 for $40,000. This implies that if you sold, you would pay a long-term capital gain at a tax rate of, say, 15%. We could assume, pessimistically, that the S&P 500 will decline 20% over the next five years and that if you took your capital gain now, you could invest the money at 3% in a double tax free municipal bond fund.

With this set of assumptions, let's compare where you would end up in five years under two options:

• Sell now and reinvest in a money market fund: 5% compound annual return after seven years (e.g., if you invested $40,000 in 2005 and took the proceeds from selling now after tax -- $48,500 (=$50,000 - the $1,500 capital gains tax payment) -- and invested them for the next five years at 3% -- you would end up with $56,225.
• Keep the money where it is: 0% return after seven years (e.g., the $40,000 you invested in 2005 is worth $40,000 at the end of 2012 since it declined 20% from the current $50,000).

The conclusion from this analysis would be to sell now and reinvest in a money market fund.

Some caveats: If you use different assumptions, you will get different answers. The example vastly oversimplifies the financial position of most investors. And it would make sense to analyze this decision under different scenarios -- e.g., pessimistic, optimistic, and status quo -- since it is impossible to predict the future.

However, with the markets in free fall, it does not make sense to just sit there and do nothing. It might be good to start thinking along these lines about whether it's best to hold on and wait out the decline or sell and reinvest in something safer.

Unfortunately, as I posted earlier, what looked safe before might not be safe anymore.

Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter.