Last Thursday, Federal Reserve Chairman Ben Bernanke made a not-so-astonishing remark that caused the market to tumble 135 points in a matter of minutes. The remark was that the economy is sluggish, but will improve later in the year.

In other words, Mr. Bernanke does not think we are going to fall into a recession. Is this bad news? No. So, why all the selling?

Well, the market did not perceive it as good enough news.

Speculators Add Volatility

By "the market," I mean speculators as distinguished from investors. And it is a very important distinction. Speculators are seeking quick gains from price increases on risky assets. Many are leveraged and must move quickly on new news. Frequently, the buy/sell orders are computer-triggered and automatic. Speculators create volatility. And the more uncertainty they encounter, the higher the volatility.

Investors, on the other hand, are long-term holders who think in terms of buying companies instead of stocks. They (the investors) tie their own success to the success of the companies they own, and ultimately to the world economy. It's a very different attitude. Investors are rewarded by returns which include dividends and capital appreciation. Investors don't produce much volatility.

Investors Endure Volatility

To an investor, volatility is a big wind they must endure while they patiently try to stay on course. In other words, the daily urgency of the stock market is a giant and noisy distraction to the business of investing. You can't think clearly when standing in the middle of this distraction. Stand aside and look carefully. Every morning you will see the same thing on CNBC. The market opens and someone is on the floor speaking in a loud and excited voice about what's going on. Experts are called upon a few minutes later.

All of this is meant to make you think it's very important. Buy now! Sell now! Can you imagine getting your morning weather report this way? And weather forecasters, as imprecise as they are, are better than the market forecasters.

A lot of opinions are as interesting as they are confusing, but they hold no value for the investor. The smart investor overrides the conflicting confusion that even fund managers can't escape and simply invests in the market itself.

Retirees Should Be Investors

Retirees, of course, should be investors and not speculators or timers. But then, how do investors weather the high storm winds that buffet their investment boats?

Well, to begin, they should have a boat that can withstand stormy seas. The middle of a storm is no time to wish for a safer one. If you understand your risks and have confidence in your portfolio, there is nothing to do but pull up your collar and ignore the wind as much as possible.

This takes some conviction and perhaps some experience. If you have not experienced an uncertain market before, you may find you are very nervous and worried. In that case, your asset allocation may exceed your emotional tolerance. And as I discovered in 2001, passing the emotional sleep test can be a matter of a small change.

Going into the bear market of 2000-2002, I held an allocation of 50% stocks and 50% bonds, with a range of plus or minus 5%. By mid 2001, as the market continued to sink, I was failing the sleep test. I made a very conscious, long-term decision to move my allocation to 45% stock and 55% bonds.

This small change really doesn't make much difference in loss prevention, so it would seem to be irrational. (Portfolio loss potential in a bad bear market like 1973-74 can roughly be considered to be about one-half your equity allocation.)

Rational or not, the change worked, and I still comfortably hold the 45/55 portfolio. So at least on an emotional level, I have reached my true comfort zone. The point is that each investor must find his or her all-weather allocation and stay with it.

It may take a bad storm to realize you are not at your comfort level. If you feel you need to make a change, you will probably find you aren't that far out of your tolerance zone.

Make the change a permanent one and stay there.