The last few years in the US stock market has been one of the most volatile periods on record. You would think that Mr. Dow would take a valium already and calm down a bit. Whether 2012 will turn out to be another up and down year (The S&P 500 finished 2011 essentially flat despite the wild swings along the way), only time will tell. Regardless, all equity investors should not only be prepared for big short-term ups and downs, they should embrace them as well, or at a minimum, not fear them.

First some context: Volatility, at least in the context of the stock market, is defined by how much on average the stock market can be expected to rise and fall over a given period, typically a year. For the S&P 500, it is around 15%. For any given twelve month period the market may rise more or less than 15%, but that is a good expectation. Movements can be sudden and dramatic, like the 10% intra-day drop and rise of May 2010 during the so-called Flash Crash.

Movements can also be slow and steady like the market generally moved during the mid-2000s when volatility was tame. Or movements could be anything in between.

The question for smart investors is: why does it matter that the market has short term ups and downs? If it tends to move up around 9% per year over long periods of time, who really cares what happens on any given day, week, or month? The problem is, plenty of people do, and that is where mistakes are made. Investing in the stock market is akin to running a marathon.

If you were on mile four of a 26 mile race and you faced a hill, would you panic? Would you bail out of the race? Would you try to ‘make up’ for the hill by sprinting up it? If you did any of these things, you would harm your chances of attaining your goal which is getting to the finish line in one piece and under a certain time. In essence, whether the course is flat, upward sloping, or downward trending, you should stick to your plan of running a steady, even race.

The same applies to stock market investing. If you need the money in the next couple years for other purposes (a down payment for a house, college tuition, a vacation, etc.) then you should not have it invested in the stock market to begin with, and as such you would be indifferent to the manic moods of stocks. Instead, if you are in it for the long-term, as you should be (retirement, etc.), then whether the market is as smooth as a baby’s bottom or rising and falling like killer waves on a good San Diego surf day, you should again be indifferent.

While we often feel the need to take action when there is movement around us, in most cases taking no action is the best plan of action. The one thing you do not want to do is to sell in a panic. Look how many times in the last couple years the market has dropped dramatically only to come roaring back soon thereafter. Pity those who were investing for the long term but who sold at intra-year lows (often only to repurchase the very same stocks later at higher prices).

The smart thing to do is to consider buying more high quality stocks on weakness, or if you own dividend paying stocks, reinvest the dividends to purchase more shares at lower prices.

The stock market always has been, and always will be, full of surprises to the up and downside. As with anything in life, the key to success is to have a plan and stick with it. Letting the inevitable vagaries of the market dictate your actions is a recipe for disaster…and a smaller bank account. Embrace volatility as your friend, or at least keep your enemies close.

(The information in this article is strictly for educational and illustrative purposes and is not an attempt to furnish personalized investment advice or services.)