When Markets Plunge, What Should Ordinary Investors Do?

During the last decade, the markets have gone through three extraordinary traumas that sent stocks plunging. The first was the dot-com crash, which sent the Nasdaq down from 5,000 to somewhere south of 1,000. It's still less than half of where it was at its peak. The second was the market sell-off that followed 9/11. And the third was the plunge in stocks sparked by the financial crisis. That drop bottomed out in March 2009.

This week's panic over Greece may end up being a fourth. In the previous three, I've suggested to people who've asked that they shouldn't sell all their stocks and that, in fact, they may want to take out their shopping lists and start picking up the stocks of good companies that have suddenly become much less expensive.

On Thursday afternoon, the Dow fell 1,000 points and then rebounded to close at 10,520, down 348 points. On Friday, the Dow continued to see-saw. Since peaking for the year at 11,205 on April 26, the Dow has lost about 6% of its value. Who knows why the markets plunged? While there is concern about glitches and trading errors, there is far more at stake here. The fact that the market was so easily spooked could have a great deal to do with concerns about instability in the eurozone.

Greece is certainly in trouble, and its debt crisis could affect the entire European Union while causing a flight to quality. As I wrote in a column on DailyFinance last week, it could take a $792 billion EU TARP to pull Greece, Spain, Portugal and Ireland out of their various overborrowing problems. And images of Greeks rioting in the streets of Athens over efforts to cut Greece's budget deficit to 3% of GDP does nothing to assure the world that the EU will be able to resolve its problems.

Relax, Check Your Safety Net, and Then. . .Go Shopping

So how should you respond to all this? As I suggested during the other three traumas, you can do a few things. First, stay calm. Second, it's worth noting that depending on your age, you should have between 30% and 60% of your net worth in something very safe, such as money market funds or an FDIC-insured bank deposit or CD.

Third, it's time to prepare a stock shopping list so you can put that cash to work when all the panic selling is over. All 30 Dow components were down and Friday's stock action has done little to help these stocks gain ground. Among the pickings: Chevron (CVX), Exxon Mobile (XOM), Hewlett-Packard (HPQ) and IBM (IBM). One stock I've been watching is a high-tech company in Massachusetts, called Hittite Microwave (HITT). It has been producing boffo financial performance along with its integrated circuits. Its shares, which are up about 40% over the past year, are attractive, in my view, under $50 per share.

The general point is that these market breaks can be buying opportunities if you have cash available and can pick companies that will continue to do well despite the volatility.