Jonas Max Ferris
There’s nothing like a few triple-digit drops in the Dow to shake the confidence of investors. Even ordinarily passive types who don’t even follow the stock market casino on a daily basis get sucked in by the gut-wrenching drops and euphoric gains that transcend mere financial media to more mainstream coverage.

This year is turning out to be especially disturbing. In the last six trading days the Dow has fallen over 100 points four times. This news has moved from the lips of financial journalists to "Saturday Night Live" comedians, who noted that the good news about the recent market carnage is our Social Security money isn’t invested in the market…yet.

So besides joke and cringe, what’s an investor to do?

In the last ten years or so we’ve gone from a pervasive “buy and hold” mentality, to a “buy on the dips,” to a “sell before you lose your shirt” (A.K.A. use stop loss orders).

Each system to beat the system has one thing in common: it would have worked over the preceding few years (which is why it became a system in the first place). When one system stops working, we learn another system.

I assure you many of these big proponents of stop loss orders and selling after the market slips X% to avoid bigger calamity or the next Enron were big “buy on the dipsters” back in the late 1990s. But then, some of today’s energy and commodity stocks biggest bulls were bubble-era proponents of tech and telecom wonderstocks. One can only wonder what they’ll find next when this latest crop of hot stocks fails.

With no modesty, my advice is more timeless than what would have worked in the last few years, had you done it, but probably won’t work going forward now that everyone is doing it.

First, don’t have so much wrapped up in stocks that a 20% drop in the market makes you panic and do something stupid. What’s a good gut check? Take the most you can stomach loosing in your total portfolio (401(k)s, IRAs, the whole kit and caboodle) in a bad year, double it, and that’s a percentage to put in a diversified stock portfolio.

Second, a few hundred points up or down is a non-event as far as changing around your portfolio. A few thousand points, and now we’re talking.

What you can do that is more active, and there is nothing inherently wrong with being inactive and parking X% of your money in an index fund for the long haul, is rebalance your portfolio back to X% in stocks after a big move.

If the Dow is down 3,000 points this means buying more stocks; if the Dow is up 3,000 points in a short time period of time you will be selling. Both are hard to do because your gut (and many loud people) will be saying do just the opposite. You’ll find these moves easier to do if you’re not overextended into stocks at the get go.

If you want proof such a system is not a short-term fad, look no further than the world of mutual funds, where there are thousands of fund managers (earning billions in fees) exploring different investing strategies for years, sometimes decades.

Virtually all the top long-term performers don’t trade frequently, which means they don’t hop in and out every time the market has a few triple-digit days. Some don’t even fully invest unless stocks are cheap.

Warren Buffett, who is not a mutual fund manager, often passes on expensive stocks and waits for a real pullback, not a "Mickey Mouse" 300-point drop over a few days. These great investors often look stupid for short periods of time while people with less proven systems of wealth creation by stock speculation are drawing all the attention.

Markets don’t go nuts. People go nuts. People tend to underperform market indexes like the S&P 500 over time, because they panic at the wrong time and get excited at the wrong time.

The average fund investor has underperformed the market by far more than the high fees of funds can explain. The market goes way up, and they feel like they missed out on making money and dive in, lest they miss more free money. The market sinks, and they panic sell, sure the entire house of cards is about to collapse.

Worse, they are attracted — like moths to a flame — to whatever has been the hottest investment over the last few years. This is a good way to become an investing “has been,” like so many hot fund managers from the late 90s are today. You don’t have the luxury of screwing up with someone else’s money.

Don’t be one of them.

This weekend our Business Block has much more on how to ride out a rocky market. Tune in Saturday 10am — noon ET.

Jonas Max Ferris is a regular contributor on "Cashin' In" and is co-founder of MAXfunds.com .