As Old Shooter mentioned, stock prices are seemingly a random walk with a slight upward bias. While I don't agree with that entirely (because I firmly believe there are human psychological aspects which influence price action), I wholeheartedly agree with the slight upward bias part.
Understanding why this is so is fundamentally important and seeing this has influenced my outlook on many things. In the long run, the standard of living is a function of efficiency (productivity). One only has to look back a 150 years or so, and compare what percentage of labor was used for farming, that is to provide the very basics of food to eat and to be in some sort of shelter from the elements.
It is because of productivity (and I would say because of capitalism) that a much higher proportion of the worlds population is living above poverty today vs. 50 or 100 or 150 or 200 or .. years ago. Is it perfect - by no means so, but the "slight upward bias" is there. This is reflected in profitability that corporations are able to achieve, and the fundamental reason why they will be successful over a long period of time. Could that change because of war, government policy, or a giant asteroid? Sure. But I'm still willing to bet *some* of my deferred spending (aka wealth) that the upward bias will continue.
The Efficient Market Hypothesis (EMH) states that financial assets reflect all available information, and as a result it is impossible to beat the market on a risk adjusted basis over a long period of time. I'm not so sure of this, because humans have been shown to have incorrect (in terms of best economic outcome) assessments of information. It is just how our brain works. As a result, I think that instead of processing the probabilities correctly as new information occurs, we instead tend to have psychological responses that result in overshooting both on the upside (euphoria) and downside (doom), and this is shown in market conditions.
In the end, each of us needs to assess our tolerance for risk. It is times like these where that assessment becomes 'real'. One thing is for sure, there is always increased risk to get increased return. And as I've babbled on this forums many times - asset price decline risk is only ONE of the risks we face. Even assets with guaranteed returns (such as CD's) have risks.
In my case, I have a pension (from my previous mega-corp), and am still drawing a salary (so I am not forced to withdraw assets from the market). Even with that, I have a hefty cash position, because it helps me sleep at night and because I want to have cash on hand if the market goes considerably lower.