What Investors Need to Remember in Volatile Markets

Maybe the best investment these days is in any company that makes neck braces. What with all the whiplash volatility we're seeing in the stock market, sales must be brisk. Shares plunged Thursday on some weak jobless claims numbers and renewed fears over debt problems in the eurozone.

That's just a day after the major U.S. indexes posted smart gains because Federal Reserve Chairman Ben Bernanke pledged for the umpteenth time to keep interest rates at essentially zero for an "extended period."

The blue-chip Dow Jones Industrial Average ($INDU) shed nearly 200 points early in Thursday's session before greatly paring its losses. The broader S&P 500 ($INX) and tech-heavy Nasdaq Composite ($COMPX) followed similar trajectories. But whether you're a pro or Joe Blow, the latest daily slew of market-moving news should have little bearing on your investments -- if you're properly allocated for your own personal situation and have a long-term plan. Those are two big -- but crucial -- ifs.

Don't Be "Reactive"

Bernanke, wrapping up two days of testimony on Capitol Hill Thursday, offered absolutely nothing new yesterday, and yet stocks rallied. That's because traders with high-stakes, short-term bets set the market's direction every time the Fed chief so much as belches.

"There are two kinds of investors who have emerged from the crisis: proactive and reactive," says Keith McCullough, CEO of Hedgeye Risk Management, a New Haven, Conn., research outfit. "Running after the manic media's fire-engine chasers is reactive."

McCullough is a former hedge fund gunslinger -- a guy who understands plenty well the speculator's imperative to furiously "trade the tape." It's a fool's errand, even for most pros, McCullough says, let alone for retail investors. That's because all concerned should have positioned their portfolios for the inevitable withdrawal of stimulus some time ago.

"It's no longer a question of if Bernanke raises the fed funds rate. It's when," McCullough says. "Being proactively prepared for a rate hike is where you want to be."

Say It Again, Ben

As bearish David Rosenberg, chief economist and strategist at Canada's Gluskin Sheff (and formerly of Merrill Lynch), reminded clients Thursday: "U.S. stock market rallies yesterday -- albeit on lower volume, yet again! -- just because Mr. Bernanke emphasizes that the [fed] funds rate will stay where it is for an extended period of time. Perhaps we should have Bernanke issue a press statement every day hammering this same point over and over again, and we will be back at the highs for the S&P 500."

The bottom line: Unless you work on a proprietary trading desk at, say, Goldman Sachs, you'd do well to ignore short-term market noise. You can't day-trade your 401(k), anyway. Churning the rest of your portfolio just puts fees in the coffers of your brokerage -- and money in the pocket of whomever took the other side of your bet.