There's nothing like a market freefall to scare some sense into rally-blinded investors. The danger, though, is that you'll overcompensate all the way from being irrationally exuberant to being irrationally terrified -- and that can be just as damaging to your portfolio.
Dealing with the jitters
Yesterday's 200-point drop in the Dow came with all sorts of ominous-sounding news. Downgrades of European sovereign debt sent the currency markets plummeting, as some now believe that Greece will have to leave the euro. Congress grilled current and former Goldman Sachs employees, referring to transactions beyond the subject of the SEC's current lawsuit and suggesting that the issue may not disappear anytime soon.
As all this bad news dominates the headlines, it's easy to lose perspective. Yet while drops of 2%-3% in a day aren't inconsequential, they are puny -- at least when you put them into a bigger perspective.
Much ado about very little
Pull back for a minute, and you'll see just how silly it is to turn from glee to fear on a dime. Since last March, the Dow has gained over 4,500 points from its lows. The S&P was up more than 80% from its bear market lows before this minor setback.
Even from a shorter-term perspective, these losses don't mean much. The Dow has risen for eight consecutive weeks, and this drop only brings us back to the levels where we were on April 8 -- less than three weeks ago.
Talk up the bad, downplay the good
Perhaps the more important insight, though, is that even with these huge issues overhanging the entire market, there was plenty of good news today -- the same sort of good news that has supported the market's latest advance. Consider:
(NYSE: MMM)announced that its first-quarter earnings per share rose 74% over last year, with a 25% rise in sales. The company's industrial and transportation segment posted some of the best results, suggesting that the economic recovery is filtering through to some of the nation's largest businesses.
(NYSE: WU)didn't see the same level of success, with net income falling 7% on revenue growth of just 3%. But its money-transfer business activity remains strong, which was enough to vault shares higher by 6% yesterday.
(NYSE: AVY)reversed a year-ago loss, reporting a profit of $54.7 million or $0.51 per share. The company expressed that it was "more confident about a modest recovery" and said that it was pursuing an aggressive strategy to take advantage of it.
- The transportation sector delivered a double-whammy to bears who think the recovery is false. Both UPS
(NYSE: UPS)and railroad Kansas City Southern (NYSE: KSU)beat estimates. More importantly, from a macroeconomic point of view, both companies saw big volume gains, indicating that their business customers have started to move their goods again.
On another day, these stories would have been front and center, and investors might well have used them to justify a triple-digit advance for the Dow. But those who rely only on mainstream media for their financial news may never hear about these companies and how they did -- simply due to the accident that they happened to release results on a busy news day.
Keep your focus
There are a few lessons you should take from this. First, if you react to every zig and zag in the markets, you'll drive yourself crazy in short order. Instead, find a way to filter out meaningless noise to seek out trends that will have a long-term effect.
Second, the market is no more than the sum of a bunch of different companies, each of which can go its own way. If you assume that every company will act like a broad index, you'll miss out on a lot of opportunities.
Finally, realize that whenever good or bad news dominates a given day, that doesn't mean that everything that happened fits the prevailing mood. On good news days, be sure to look for warning signs that you might otherwise miss. When everything looks horrible, look for the bright signs among stocks -- they may prove to be your best defense if conditions stay poor.
You've spent a lot of time and effort coming up with the right investments. Don't let a single gloomy day undo all the work you've done.
Many follow the Oracle of Omaha with unbridled devotion. But Fool contributor Morgan Housel is convinced that Warren Buffett is wrong about this.