The Dow Jones industrial average has had 12 triple digit moves in the last 18 sessions, going down 8 times and going up 4 times by more than 100 points, sometimes swinging 2-3%.  What are investors to do about this manic-depressive stock market?  The answer is absolutely nothing.  That is, you should not be doing anything that you wouldn’t be doing anyways if the markets were completely stable.  Ignore all the noise and focus on making sure your investment strategy is sound.

The fundamentals of a sound investment strategy do not change when the market is highly volatile.  In fact, a sound investment strategy accounts for the fact that sometimes the market will go up and sometimes it will go down, and it does not matter if it happens in small amounts or big amounts, or whether it all happens in a few weeks or over a longer time period. 

Here are the fundamentals of a sound investment strategy:

Diversify

Your investments should be diversified across multiple asset classes including stocks, bonds, real estate, commodities and cash.  The portion of your portfolio invested in stocks should also be diversified across multiple companies and types of stocks including growth and value, small cap and large cap, domestic and international.

Invest for the Long Term

Investments were meant to be a long term activity.  Otherwise it is not an investment, it is speculation.  If you are invested for the long term, the short term variations of the stock market are nothing but noise.  If you ignore the noise and focus on the long term you will increase your chances of becoming a successful investor.

Use Dollar-Cost Averaging to Your Advantage

If you buy stocks on a regular schedule you will sometimes but at a higher price and sometimes at a lower price.  In the end you will average out the ups and downs of the market.  The important thing is to set your buying schedule on auto-pilot so that you are not tempted to buy when there is euphoria in the markets, and therefore prices are high.  By the same token, when you use dollar-cost averaging you will avoid the temptation of holding off on buying when there is fear in the marketplace and consequently prices are low.

Ignore the Media

If you follow what stocks are doing on a daily basis and let your behavior be influenced by the ups and downs of the market, you will drive yourself nuts.  You will also be likely to make the wrong decisions and sell stocks when prices are low and buy when prices are high.  The less you pay attention to the day-to-day headlines of the financial news the more likely it is that you will stick to a sound investment strategy.

No one can tell whether the markets will go up or down in the short term.  Historically stocks have been one of the best investment vehicles available in the long term.  However, some volatility is to be expected.  In fact, some pull backs are healthy and necessary in order for the market to continue growing.

If you are worried about the recent issues with the sub-prime credit crunch and its potential impact to the overall economy, and more specifically to the stock market, just remember that not even the most accomplished economists can agree on its potential impact to the market.  Stick to your investment strategy and in the long term none of this noise will matter.

As paradoxical as it may sound, when it comes to financial news, the less you pay attention to it, the more likely you are to make the right decisions.