After the Madness, What's Next?

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Few weeks on Wall Street can match the craziness that last week gave investors. Four days of huge volatility, followed by what seemed like a quiet Friday by comparison with a 125-point jump for the Dow, has everyone on edge.

What's next?
In the aftermath, everyone's looking for answers about what's to come. Poring through all the things that investors did during last week's roller-coaster ride yields many different insights:

  • On the commodities front, hedge funds poured into gold and precious metals, but interest in other commodities like base metals and foodstuffs largely evaporated. In particular, copper saw speculative demand drop by more than 60% for the week, potentially boding ill for big copper producers Freeport-McMoRan (NYS: FCX) and Southern Copper (NYS: SCCO) .
  • After a huge run that sent CurrencyShares Swiss Franc (NYS: FXF) to record levels, foreign-exchange traders put their feet on the brakes, cutting dollar-bear bets by half last week. That may seem surprising in light of the S&P downgrade of U.S. Treasury debt, but the bond market's complete disregard for the downgrade makes it clear that the U.S. won't have trouble with financing its debt anytime soon.
  • Investors fled from emerging-market stocks, pulling out $7.7 billion from emerging-market funds during the week. Given that benchmark ETF Vanguard MSCI Emerging Markets (NYS: VWO) saw an even greater percentage drop last Monday than the S&P, investors seem to figure that economic conditions are just as likely to hurt stocks in places like China, India, and Brazil as they are in the U.S. and other developed markets.

Those markets don't look like they have much in common. But they show one similar feeling among investors across the financial markets: traders are questioning whether long-held positions that have worked for months or even years will continue to work.

The impossibility of timing
At least at first glance, getting in on a profitable trend early seems like the key to making money in the markets. No matter what market you're talking about -- gold since 2000, oil since the late 2008 commodities crash, or stocks since the March 2009 bottom, just as examples -- you can always point to a trend and play the "what-if" game, thinking about all the money you would've made if only you'd bought early.

But there are several problems with that approach. First, it takes time for those trends to establish themselves; when they first begin, they usually look like extensions of the previous trend. Second, for every trend that establishes itself, you can find several failed attempts on previous occasions. And perhaps most importantly, if you don't understand why a trend exists, then you'll have no chance of correctly identifying when it's time to get out. Latecomers to a dying trend get hurt the hardest.

A better sign of stability
By contrast, long-term investors appear to be mostly staying put, which is a good sign. According to a study from Vanguard, only 2% of its more than 3 million 401(k) customers made any sort of equity trade -- and that number may actually include routine trades that would have occurred regardless of the market swoon.

That's exactly what you'd want to see -- and exactly the advice that Fools gave to many investors during our live chat sessions last week. As hard as it may be to stand still when the world is going crazy around you, it really comes down to one simple fact: If you have a strong investing strategy in place, the worst thing you can do is to jettison it right when you need it most.

Businesses that match up with that philosophy tend to be long-term winners. PepsiCo (NYS: PEP) has spread its well-known products across the globe with great success. ConocoPhillips (NYS: COP) and its strategy to divest non-core holdings and separate its core businesses by spinning off its refinery assets can bring big benefits no matter what energy prices do. And as JPMorgan's (NYS: JPM) CEO Jamie Dimon said last week, "We don't run the business based upon what happens in the market in a day."

Don't panic!
Which will you be: a trader or an investor? Different people succeed either way, but for my money, it's a lot easier being an investor. Stick to your guns, and you'll get through this turbulence in one piece.

If you need some good stock ideas to help you do that, look no further. The Motley Fool has five stocks you should look at; this free report explains why the Fool invested its own money in them.

At the time this article was published Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance. You can follow him on Twitter here.Fool contributorDan Caplingerprefers his madness in March. He owns shares of Vanguard MSCI Emerging Markets. The Motley Fool owns shares of PepsiCo, Vanguard MSCI Emerging Markets, and JPMorgan Chase. Motley Fool newsletter services have recommended buying shares and creating a diagonal call position on PepsiCo. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool'sdisclosure policywill help you from going mad.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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