Was Market Sell-off Caused by Greece or Glitch?

Just as I was getting in the door, around 3 p.m. EST Thursday, my husband announced from the living room: "the market is incredible!" "In an up way or a down way?" I inquired.

Since the early morning, with the riots in Greece plastered all over the TV channels, the financial markets have been in a downward spiral. Right around 2:45 p.m. EST, the Dow Jones Industrial turned into a freefall, plunging to a loss of 998, and rebounding 500 points in matter of minutes! After reeling through a volatile day, the Dow Jones Industrial Average closed down 347.80 points or 3.2 percent at 10,520.32. The Standard & Poor 500 index dropped 37.75 points or 3.24 percent to close at 1,128.15 and the Nasdaq closed at 2,319.64, down 82.65 points or 3.44 percent.

Even safe dividend stocks like Procter and Gamble (PG) fluctuated violently yesterday. Investors who had put a stop loss on this stock most likely got triggered at the market prices that dipped as low as 30%! P&G's stock swung from 60 to 40 and back to 60 during that particular moment. Volatility like this is enough to scare the wits out of small investors like me. The psychology in investing in the financial markets has been damaged, no question about it. Investor confidence has been hurt. Again. With the housing market in the doldrums, the banks in trouble, the Euro in peril, and now the stock market selloff, where do we put our money now?

As someone who took early retirement after the Internet bubble in the year 2000, my investment criteria is probably different from most people's. I have a longer horizon, and I don't mind going back to work. If only I can find work! After experiencing the last 2 downturns (2000 and 2007), I have tried to become a better investor, but that doesn't always work. More importantly, I have downsized and cut down my spending tremendously.

But to be able to sleep at night and not worry about what your money is doing, you have to find investments that you are comfortable with. If you are fully invested, there is no way you could liquidate all your holdings on irrational days such as yesterday. The best thing to do is to stay calm and not panic sell. Some things I have learned from the past are as follows:

Dollar cost averaging
If you are participating in your company 401K plan, you are already dollar cost averaging. Every quarter, your plan use your allocated hard-earned wages to purchase whatever investments you have selected in your plan.

Asset Allocation
You have heard this over and over: don't put all your eggs in one basket. You need to diversify your holdings, be it mutual funds, ETFs or individual stocks, and internationally. You need to do this according to your age and family situation.

Cut Spending
The government may be able to spend and spend, until one day, it find itself in a situation like Greece. As individuals, we cannot spend like that without losing our homes, our cars, and our self esteem. We have to live within our means. It is not easy, but we have to try. We have to go back to the basics.

Read and Learn
There is so much information out there on investing. Do yourself a favor, and read up on them, on the Internet or pick up some magazines - Money, Fortune or Forbes. Or watch CNBC. If you feel better with a financial adviser to help you navigate the maze of investing, by all means, go get one!

Sources:
http://www.nytimes.com/2010/05/07/business/07markets.html?src=me&ref=business
http://www.cnbc.com/