Volatility requires savvy timing

The Dow Jones industrial average has plunged from an intraday high of 11,022 to an intraday low of 7,774 – a swing of nearly 3,250 points. In October alone, excluding Friday, the Dow lost 17.1 percent, putting it on track to be the worst month since October 1987.

On days when the market is behaving like a troll with a hangover, it’s hard to react rationally. But if your first instinct is to sell, consider a few points:

•There’s nothing horrible about selling. In fact, if you have stock investments in a taxable account, you can get a decent tax break for selling before Dec. 31. You can use your losses – short-term or long-term – to offset any amount of gains you might have. You can then deduct $3,000 of any additional losses from your income and carry any remaining losses to the 2009 tax year.

•That said, selling is best done in tranquility. Start by asking: When did I plan on using this money? If you were saving for a goal that’s 10 years or more away, you just hang on. A broadly diversified mutual fund will probably recoup your losses faster than a money fund. After all, the average money market fund now yields 1.5 percent, says iMoneyNet. At that rate, you’ll double your money in 48 years.

•If you’re investing in a mutual fund, don’t sell in the morning. You’ll get the fund’s price at the market’s close no matter when you sell. Let’s say you wake up and the Dow is down 500 points. By lunchtime, the Dow could be up 700. Because the market’s so volatile, you should wait until at least 3 p.m. to place your order. Don’t wait too long: If you sell after 3:30 p.m., your order might not be filled in time.

•What if you’re seized by a fit of madness and decide to buy? For example, suppose the Dow plunges 1,000 points. You think to yourself, why not try to pick up a stock on the cheap?

This isn’t an entirely bad idea. If you put in a market order for 100 shares of Unmitigated Horror, however, you’ll get whatever price the stock is going for at the moment. If you put in your order in mid-fall, however, you could buy Unmitigated Horror at $15 and still see it end the day at $14.50.

Instead, consider putting in a limit order for a price at which you want to buy – say, $14.60. Your broker won’t execute the order above that price. You might not get the stock at the price you want – but if you do, you could get a bargain.