When to be fearful or greedy

Superinvestor War- ren Buffett has recom- mended simple, low-fee index funds — such as those that track the S&P 500 — for most investors. The beauty of such funds is that you can just keep adding money to them over time, no matter what the market is doing, and they'll deliver roughly the same return as the index (less fees). Many investors would rather invest some or much of their money in individual stocks, though. That takes more work, and it's not always easy — especially at times like this.

The stock market has declined sharply over the past few months, with the S&P 500 recently down more than 18% since the beginning of the year. Quite a few previously high-flying stocks (the kind that attract a lot of investors) have fallen by 50% — and some by much more. That can easily rattle investors, and the falling market reflects many of them frantically selling.

Some of those investors may be selling because they no longer have faith in their investments, and that's fine. Others, though, are selling in a panic simply because their peers are selling. That's generally the wrong thing to do in a big market sell-off, though — because that's when great stocks are often on sale.

Buffett has also advised investors that if they “insist on trying to time their participation in (stocks), they should try to be fearful when others are greedy and greedy only when others are fearful.” In other words, if everyone's buying and the market is surging, tread carefully, as many stocks will be overpriced. And when the market drops sharply, that's a great time to go shopping. Buffett's advice is essentially another way of saying “buy low, sell high” — the main way to make money in stocks.

Pronounced volatility in the market such as we've recently experienced can be stressful and even frightening, though. You might reduce your stress by reading more about investing and understanding that the market will always be volatile. Remember, too, that every crash has been followed by a recovery.