Can anything be done to mitigate market volatility? And do you even need to worry about it in the first place?

Let's start with the second question first. You know that money that's taken out of your paycheck each pay period and put into your 401(k)? (You are maxing out those contributions, right?) Market volatility means you are essentially reducing the average cost of your investments. To use an extreme example by way of explanation, if markets never did anything but go up, you would always be paying more and more for your stocks, bonds, and funds. Every two weeks, that pre-tax withholding on your paycheck would go toward at least slightly higher prices on your investments, raising your average cost each time. But because markets take a tumble on occasion, you're able to lower the average price you're paying. This is an example of dollar-cost averaging.

So to answer that second question: No, if you're still working, you don't really need to worry about volatility, and in fact you should welcome it. If you are going to be a net buyer of investments over time, you want their prices to be lower, the same as you would bananas or socks. And if you have a while (10 years or more) before you retire, you should be a buyer of stock investments. You should hope that the many predictions about near-term market performance are correct (that stocks won't do as well over the next 10 years versus the prior 10), because it will mean lower prices for you.

However, bear markets can and do blow up retirement plans if they hit at the wrong time . . . which is roughly right before or right after you retire. You don't want to be headed into retirement with a big slug of stocks that you are planning to sell to cover a large portion of your living expenses over time, only to have those investments' value cut in half by a recession another reason that leads to a spike in volatility.

The key, then, at least at a big-picture level, is to take advantage of the volatility in your working-and-investing years, and be wary of it and protect against it during (or as you get close to) your retirement years.

Now, how can we do that last part?

1. Make friends with dividends. Remember that market volatility often has little to do with a company's business fundamentals. In times of panic, a company's stock price might drop steeply even though nothing (or nothing much) has changed with its underlying business.

If your retirement plan has you selling shares no matter where we are in the business cycle, you could be in trouble. But with the right batch of investments, you could still count on income from dividends no matter what the markets are doing.

That's partially because a lot of companies are committed to making dividend payouts year-in and year-out. Of course that doesn't mean that they will always be able to do so, but if they have a history of it--and there are plenty of firms out there that have increased their dividend payouts every year over 20, 30, or even 50 years running.

Shall we name some names? Coca-Cola (KO, forward yield 3.5%) has paid out increasing dividends for 57 consecutive years. ExxonMobil (XOM, forward yield 4.15%) has done so for 36 years. Altria (MO, forward yield 6%), 49 years.

That's the beginning of an industry-diversified, income-producing portfolio right there. But if you're not into picking stocks yourself, there are well-diversified, low-cost mutual fund and ETF options that can get you a portfolio yielding 4% or so with no trouble at all--and with some dividend growth too:

Invesco S&P 500 High Dividend Low Volatility (SPHD, yield around 4%). Big dividends and low volatility? It may sound too good to be true, but it's not. This 50-stock ETF portfolio is pretty close to a one-stop shop for domestic dividend investors, and its fees are low for an actively managed fund.

Vanguard Global ex-US Real Estate (VNQI, yield around 4.25%). This fund carries some emerging-markets risk, but with that risk comes opportunity for growth, all with a relatively big yield and of course Vanguard's ridiculously low fees.

iShares International Select Dividend (IDV, yield around 5%). This low-fee fund gets you 100 holdings that skew more toward developed markets than emerging ones, with only a very small portion in the U.S.

Here's a simple back-of-the-envelope before-and-after. Say you have a $1,000,000 portfolio of stocks at retirement, and you're planning on needing around $50,000 a year to live on. You'll be drawing down 5% the first year, and somewhere close to that in the years immediately following. That percentage could ramp up over time, depending a lot on what the stock market does.

If that portfolio gets cut down to $750,000 due to a bear market, you're suddenly looking at a nearly 7% draw-down rate right out of the gate, assuming no change to your living expenses. Your portfolio will likely be depleted about 25% faster than before.

But what if you could get a 4% dividend (and/or distribution) yield on that initial million-dollar portfolio? That would get you $40,000 without touching the principal. Taking the remaining $10,000 by selling some securities will be a lot less painful in a down market than taking $50,000. If the portfolio did get cut down in value by a bear market, those dividends would likely still keep coming.

2. Diversify, but don't worsify. The funds above are great for exposure to stocks. Do you need to be in other assets too?

Probably--especially as retirement nears. We're thinking of fixed income (bonds) here. How much of your portfolio should be in bonds will depend on your risk tolerance more than anything else.

Most individual investors--even those who buy individual stocks--won't want to invest in individual bonds. So, as with stock funds, what you're mainly looking for in a bond fund is low fees. If you are hoping to just purchase a single bond fund, you'll also want to make sure it is well diversified by credit quality, issuer, and duration.

As usual, it's Vanguard to the rescue here. Vanguard Total Bond Market ETF (ticker BND) is a great place to start for any budding bond investor. Its .05% expense ratio is about as low as it gets, and while it might skew conservative (toward Treasury bonds) for some tastes, it's tough to beat in its category. On the more aggressive side, iShares iBoxx $ High Yield Corporate Bond ETF (ticker HYG) could be a good option for boosting your fixed-income yields, though with a fair amount more risk than BND. BND currently yields around 3%; HYG's is more than 5%.

Downside Protection

Market volatility isn't going away. If you're going to be an investor, it's just part of the game. But you can do more than just let it happen, hoping for more of it in your early investing years and less of it later. Getting a passive stream of income (like dividends) is a great place to start; getting your asset balance right as part of an overall retirement plan should also be near the top of your personal finance to-do list.