It’s impossible to ignore world markets when they sell-off in a broad fashion — more so now than ever, when what used to be front-page news is microsecond Twitter material, impacting our investment portfolios before most of us can even read the tweet.

For an investor, it’s frustrating. You invest your hard-earned money only to have threatening block letters screaming across the media, detailing the previous day’s losses and raising ominous questions about the future of the world’s prosperity. And while it’s all fine and well to worry about the world, most of us are worrying about ourselves. Fair enough.

As a professional, I’m always surprised by the doom-speak. This is mostly because I understand that a correction in the marketplace is as natural as it is necessary. What concerns me, more than any market contraction after a solid period of gains, is when an economy grows and assets increase in value without pause or correction. The real question is: How does an investor determine if a correction is just that, versus a sign of worsening conditions to come?

Sometimes, a certain sector or industry can pull the down the performance of the markets. In the financial quarter following a heavy holiday shopping season, for example, retailers will often lag in terms of return. This likely wouldn’t drag the stock market into a sell-off; still, the cyclical nature of the retail business causes the economy to depend on other sectors to support growth in markets. If that growth isn’t there, the economy can experience some contraction. Modern brokers have research tools that allow them, and you, to view market performance by sector or industry. This allows for helpful insight into whether or not any isolated correction is broad, or was caused by certain isolated areas of the economy.

Many times, sudden and deep corrections are caused by world-shaking events, like the recent nuclear meltdown in Japan or the riots in the Middle East. Corrections like these are characterized by sudden liquidation of riskier assets for cash or cash equivalents. Usually the markets are unsure of what new risks this event holds, and tend to quickly overcompensate to account for a higher probability of declining asset prices. If the economy is robust overall, these corrections often prove short-lived once the market manages to digest whatever event caused the initial shock.

That said, what has been affecting the world markets recently is a little bit more complex. Affecting the markets is a combination of event-related stresses and concerns about growth in multiple industries and sectors. Multiple large economies are experiencing growth rates at lower levels than necessary to support current deficit levels. Beyond that, there is also another kind of risk, called legislative risk, where investors are uncertain about an alteration in legislation that could affect business productivity and investment performance. The recent U.S. debt-ceiling negotiation is a great example of how legislators can shift the tone of markets abruptly and shift the perceived prospects of the economy.

Usually the summer is a quiet season in the stock markets, but above-average activity across the world has reminded investors of 2008 due to its decidedly negative tone. Keep watch for sectors and industries that are holding up better than the broad market to determine if the correction is somewhat cyclical. Follow the news closely for signs that legislators are effectively governing, or that economic indicators are showing more positive trends of growth and stability. No one can predict exactly what the markets will do, but having a plan to guide you when your investment portfolio feels like a roller coaster two words will make certain you don’t lose your lunch. And hopefully not your shirt.

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Image courtesy of Curtis Gregory Perry.