Warren Buffett, a rock star in the world of investing, has noticed the pattern of panic in the stock market recently and is using this volatility to his advantage. I am still buying into the market; the only change I’ve made is to buy more stocks, even if I don’t get the price at the lowest point on the curve.

Buffett is filling up his personal portfolio with American stocks with the goal of having an asset allocation 100% in equities in a short time. He sees fear in the market now, and he is sticking to a mantra that has worked well for him throughout his life: “Be fearful when others are greedy, and be greedy when others are fearful.”

You might think it would have been impossible for an investor to lose money during a century marked by [a gain of 17,320% in the Dow]. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.

This is an opportunity that comes around only once every few decades. If you want to have the long-term gains that financial advisers claim stocks can provide, you have to buy low and sell high rather than buy happy and sell afraid.

Photo credit: TEDizen
Buy American. I Am., Warren E. Buffett, New York Times, October 16, 2008 via ramit.

If you’re still confused, as I was, about what exactly led to the failure of just about everything financial, here’s a video made by a Senior Editor at Marketplace, explaining what happened with a clever metaphor:

Crisis explainer: Uncorking CDOs from Marketplace on Vimeo.

Money Magazine has interviewed eight professional money managers to determine how the current economic crisis is affecting their own financial and investing decisions. In many cases, the professionals are not making modifications to their plans. In a few cases, the professionals believe staying the course is the right decision but they’ve made some small changes to their portfolio.

Here are some quotes from those who indicated they are doing more than nothing:

“I’m putting more money into foreign stocks, especially emerging markets, which often rebound faster after a U.S. crisis or recession. I’m also buying hard asset stocks like oil and precious metals…”

“I have purchased some financial company stock of late as well. So far, that was a mistake.”

“The only changes have been to add cash into S&P 500. I bought the Russell 2000 and a U.S. large-cap fund. I added a little to an international fund. Prices are low right now.”

“I’m not making many changes [to my portfolio] because I’ve been well positioned for some time. But I recently bought some additional bonds because I found some good opportunities…”

Where pros are putting their cash, Money Magazine, October 7, 2008

The Dow Jones Industrial Average, a measurement of the stock market at large, ended below 10,000 yesterday. That’s the lowest closing since 2004 and it’s quite a drastic change from a year ago, when the market closed above 14,000, the highest watermark for the Dow.

It’s tempting to just stick my head in the sand. I have been looking at my investment balances, though. While it’s hard to separate my emotions as my 401(k) balance quickly moved from about $50,000 to about $40,000 despite contributions, I try to keep in mind that my time horizon is decades in the future.

When the market is in turmoil, it should put asset allocation into the front of any investor’s mind. For people who have a long time before retirement like me, it’s not a good idea to run for cover. It might be a good time to ask yourself if you’ve accurately thought about your risk tolerance. It’s much easier to say you’re willing to accept more risk in return for a higher return over the long term while the market seems to be increasing without bounds. But if you freak out when you lose 20% on paper and consider evacuating your money, either you underestimated your ability to accept risk or you just need to work a little harder to separate your emotions from your financial decisions.

I’m sticking with my “aggressive” retirement portfolio of 100% stocks. My contributions are split evenly between large cap growth, large cap value, international, and commercial REIT, while my current balance has more of a mix including mid cap growth, mid cap value, and small cap stocks. Half of my employer matching contribution is in company stock, and I exchange out of that stock when I’m in a good position to do so.

And my performance this year through September 30 is a loss of 20.85%.

On the positive side, I’m purchasing my investments at a much lower price now than I was last year at this time.

While some pundits are calling for a Dow as low as 8,000 before we hit bottom, it doesn’t make sense to make reactionary decisions, particularly when the money is invested for the long-term. It does help to review your risk tolerance to determine if you can face downturns and to find a way to strive to separate your emotions from financial decisions. Emotions are there to guide us, to let us know what may be right for us, but when emotions form the basis of financial decisions, investments suffer.

The stock market was hoping for good news today regarding the bailout bill. When the House of Representatives voted down the proposal which had support from only 60% of Democrats and 30% of Republicans, the Dow Jones Industrial Average, S&P 500 Index, and the price of oil dropped sharply.

With pressure from the Executive branch, I figured the Legislative branch would fold as quickly as they did with the PATRIOT Act when the immediate threat was terrorism rather than economic crisis. It should be interesting to see how this plays out, but I’ll try not to look at my investments until then. Perhaps I’ll use sharp downturns like today as buying opportunities.