Devoted to understanding the basics and fundamentals of investing

This post was something that hadn't been planned, but the recent dismal action of the stock markets all around the world had me thinking that this would certainly fit into our 2008 investment knowledge series. I want to look at some lessons that can be learned from a sharp and dramatic selloff like we have seen to start the year. As we have pointed out in recent posts, the beginning of this year has been worse for the market than any other year in the stock markets history. That is a striking fact that really gets a lot of people's attention and it should. The fact is the current market is more volatile than most are used to, and the large swings in the market have become more and more commonplace.

So what kind of lessons can we learn from this kind of trading action?

• Diversification is key at all times, even when its not popular.
• There is a good reason why stocks like PepsiCo (NYSE:PEP) or Proctor and Gamble (NYSE:PG) are considered such safe growth stocks. These types of consumer non-cyclical companies perform just fine in any economic environment, and the stocks outperform during turmoil.
• Taking some profits in huge winners is never a bad idea. Just look at stocks like Garmin (Nasdaq:GRMN), DryShips (Nasdaq:DRYS), Baidu.com (Nasdaq:BIDU), and Crocs (Nasdaq:CROX) for good examples of how fast the hottest stocks can take a major fall.
• Emotional investing never did anyone any good. These types of markets are full of emotions for some that they should sell every investment they own (not a good idea) or go all in because stocks are too cheap to go down much farther (also not a good idea
• When the Federal Reserve gets behind the curve, stocks react and in a big way. This is something that we hadn't seen on wall street in quite some time, but it is very clear now just how important the Fed truly is.
• Stocks fall faster than they rise because fear is stronger than greed. Remember that stocks are a great investment over the long run, but when they fall they generally do so very quickly.

These lessons learned from the recent dramatic selloff should help investors in 2008 and in future years.