3 Ways to Protect Yourself in a Crazy Stock Market

Stocks went on a roller-coaster ride on Monday, with market volatility  levels picking up considerably.

By the end of the day, though, the Dow Jones Industrial Average managed to make up most of a 300-point loss earlier in the session. The S&P 500 and Nasdaq Composite managed to push higher.

Data source: Yahoo! Finance.

There's a lot of strange behavior in the stock market right now. Stocks are seeing huge moves from one day to the next, and many onlookers are attributing the volatile moves to short-term traders looking to take advantage of situations like short squeezes to maximize immediate profit. Some of the companies with the weakest prospects are seeing the biggest gains. It's enough to make even disciplined long-term investors question whether they're missing out on a paradigm shift.

Fortunately, there are ways to stick to a more rational mindset. Follow these steps to give yourself peace of mind.

Image source: Getty Images.

1. Invert your thinking

Warren Buffett's sidekick Charlie Munger doesn't get as much appreciation from the investing community as his more famous colleague, but he has a lot of wisdom to impart. One of his more famous quotes is simple: "Always invert."

What does that mean? In this case, it involves looking at the flip side of what's making you fear missing out on big market moves.

You always hear about stocks making big moves higher, but you might not notice as much when they fall back to earth. For instance, AMC Entertainment Holdings (AMC 1.47%) was up 26% on excitement about its prospects for avoiding bankruptcy. However, investors have been similarly excited before, with the stock posting massive gains in May 2020 and then again in August and November.

Each time, shares soared, and each time, they came crashing back down again. The net result? A stock price that's trended lower and is down more than 85% since 2017. You don't need to spend time on dangerous situations when there are stronger companies to invest in.

2. Put your thoughts in an investing journal

Everyone goes through periods when it's difficult to invest, but it can be hard to remember later on how that felt and what happened afterward. 

That's why keeping an investing journal is so valuable. Write down your reaction to seeing stocks go up for seemingly irrational reasons. Give your views on why the moves don't make sense.

Later, you can go back and see whether you were right. Sometimes, you'll end up having done the right thing. Other times, you'll conclude that your thinking was flawed and you made a mistake. Either way, you will have a clearer idea of what to do next time. Studying your journal will help you learn from experience, making you a better investor.

3. Accept your limitations

Finally, it's important to understand that no one can be an expert in every stock in the market. There's always some stock soaring on any given day. But out of thousands of stocks, you can't reasonably be expected even to know about all of the winners, let alone pick them in advance.

Fortunately, you don't have to swing at every pitch in order to be successful. Sure, some of the stocks you pass on will soar. But as long as your stocks do well, you don't have to fall into the trap of comparing how much better another might have done.

Stay healthy

It's hard to watch stocks soar and not be part of it. In time, though, many of those one-day wonders come crashing back down. Meanwhile, if you're patient, the great companies you've chosen will eventually prove their worth. If they do well, you'll get your reward in the end.