3 Lessons From Tuesday's 228-Point Dow Jump

Turbulent markets can teach attentive investors valuable lessons. Here are three.

Mar 4, 2014 at 9:00PM

The Dow Jones Industrials (DJINDICES:^DJI) celebrated the apparent lessening of tension along the Ukraine-Russia border Tuesday, climbing almost 228 points and more than regaining all of the ground the average lost Monday. Whipsaws in the Russian market were even more dramatic, as the Market Vectors Russia ETF (NYSEMKT:RSX) gained 4% today after falling almost 7% Monday. As confusing as wildly thrashing markets can be for investors, the Dow's moves over the past two days serve as valuable experience that every investor can learn from. Let's take a look at three lessons from the Dow so far this week.

Lesson 1: Fast-moving situations have landmines for investors.
The gut instinct that many investors had on Monday was to sell, as they perceived a permanent escalation in the threat level within the former Soviet Union that could have a lasting impact on the geopolitical situation both in the region and around the world. Yet almost as quickly as it had begun, Tuesday seemed to bring a resolution to the crisis in investors' eyes, leading to a huge push higher.

Yet neither assessment of the situation is accurate, and the best response to the crisis is somewhere in between the near-panic of Monday and the euphoria of Tuesday. If you sold out of your stocks when bad news hit and found yourself wanting to buy back at higher prices after the news got better, then you need to adjust your time horizon -- and take a serious look at your risk tolerance to make sure you're comfortable with the tiny declines we saw on Monday.

Lesson 2: Other news doesn't stop happening.
When a big news event hits, most news networks get tunnel-vision, focusing ever more closely on every issue related to the event. Yet while everyone is obsessed by a single topic, other important news is happening that can have an impact on your investments.

For instance, in the precious-metals markets today, gold prices gave back much of their gains from Monday, as investors reversed their flight to bullion when the geopolitical situation became more favorable. Yet not all precious metals fell. Palladium actually rose sharply, as ongoing labor tension in South Africa overwhelmed any downward pressure on prices for the platinum-group metal from easing of Russian aggression. You have to look beyond the headlines of the day to know what's affecting all of your investments.

Lesson 3: Don't panic!
When a crisis hits, it's tempting to act first and think later. But in investing, thinking first before you act is a key measure of success.

If you panic-sold on Monday, then today's positive signs on the Ukrainian front and the attendant soaring stock market probably have you regretting your decision. Yet there were good reasons for investors to sell some of their stocks yesterday -- if it was part of a risk-management strategy that was put in place well in advance.

On the other hand, if you were looking to buy stocks, Monday turned out to be a great time to do so. For instance, in the solar arena, JinkoSolar (NYSE:JKS) and Trina Solar (NYSE:TSL) plunged Monday on feras of the impact of geopolitical tension on the solar business, even though Jinko had reported reasonably strong results earlier that day. Yet Monday, Trina and Jinko soared, with Trina's positive report confirming the health of the solar industry.

By preparing for difficult situations before they happen and knowing how you'll respond, you take emotion out of the equation and make your investment philosophy much more rational.

Keep learning
Even if you've made mistakes this week, don't let it stop you from investing. Experience is a great teacher, but it only works if you're willing to learn.

Great stocks always win in the long run
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Dan Caplinger and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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