I recall as a child watching my mother wringing out a washcloth over the kitchen sink. What was the point, I wondered, of pouring all that water on something only to squeeze most of it of out a few seconds later; Why not just pour less water on it to begin with, and have that much less to remove? It took me a while to figure out the answer to that question, but I have to admit that I still believe a lot of perfectly good water gets wasted in the process.

That analogy occurred to me as I was contemplating the fact that we are only nine days into 2015 and already the mood has changed considerably. The cautious optimism of 2014 has been replaced by a skittish pessimism with an itchy trigger finger. This week has witnessed both extremes, with our stock market dropping almost 3% on Monday and Tuesday before recovering most of that loss on Wednesday and Thursday – like a washcloth having an almost equal amount of water added and removed in very short order.

By now it is apparent that Europe cannot delay implementing a Quantitative Easing effort of its own any longer, and the expectation is that the European Central Bank will commence a bond buying program immediately to keep interest rates in positive territory (German bonds recently fetched a negative interest rate, with bondholders effectively paying the government to safeguard their cash for them).

The entirely predictable result is a strengthening U.S. dollar, bad for exports but good if you are in the market for products manufactured overseas. Combined with oil plunging below $50/barrel and gold holding steady around $1,200/ounce, it is difficult to conjure up much enthusiasm for the expectation of rampant inflation anytime soon.  

However, it is not difficult to envision a new round of currency wars between the East and West that could roil the economies of many emerging market countries, and along with it their political stability. All of which means we are now well into the territory of policy decisions regarding U.S. global hegemony potentially taking precedence over economic reasoning.

The one variable mostly outside the control of government policymakers is the price of oil. As OPEC proved last month, it will pretty much do whatever Saudi Arabia says, and that’s that. No amount of Fed intervention can change that, nor is there a readily available diplomatic solution. Just as OPEC held us all captive during the price hikes of the 1970’s, it is now pulling us all down with it to as yet unspecified depths.

Which brings us back to the original question; if all of these variables were known two weeks ago, what has changed since then to introduce so much doubt into the stock market this week? I believe the true answer to that question goes far beyond a simple explanation of how greed and fear manifests itself in the form of individual investor psychology, as many market pundits would have you believe.

I don’t believe you or I have suddenly become appreciably more or less irrational than we usually are, nor do I think we have suddenly became more or less greedy than we have always been. However, I’m afraid that you and I have become more exposed to the volatility that accompanies the invisible but rapidly growing web of interconnected investment products controlled by currency traders, hedge funds, and institutional investors that dictate the short term direction of the financial markets.

To be clear, this is not a conspiracy theory of any sort; each of these investors is engaging in behavior they believe will yield the greatest risk-adjusted return for their clients. And in theory that is good for the financial markets by enhancing liquidity, which in turn should result in more accurate pricing. Which it does, except when the amount of money being exchanged becomes so large that it affects prices in other markets.

So what can you, as an individual investor, do about it? In truth, there is nothing you can do to prevent it from happening, but you can devise a strategy to profit from it. A lot of good companies are going to see their stock prices whipsawed in the weeks and months to come, resulting in temporary buying opportunities if you are prepared to act quickly.

I suggest you have a short list of companies you’d love to own if only you could buy them at a price 10% less than where they are currently trading, and enter buy limit orders accordingly.

I also suggest you learn to shut out the noise that accompanies extreme volatility, which only stokes fear and invites irrational decision-making. While much harder to do in practice than commit to in thought, this is the trick that all very successful long term investors have learned. If you find that impossible to do, then consider acquiring an “insurance policy” for your portfolio by buying out-of-the-money put options on the S&P 500 Index that will cap your potential losses to an acceptable level in the unlikely event of a stock market meltdown.

For example, as of yesterday afternoon a put option on the S&P 500 index with a strike price of 1850 (about 10% below its current level) that expires at the end of this year could be bought for about $80. So, the combined cost of the option (3.9%) plus the loss at strike price works out to a maximum loss of roughly 14%, assuming your portfolio’s performance approximates that of the index (note: this strategy may not work if your portfolio consists primarily of non-S&P 500 index stocks).

That should help you sleep better at night, and give you the resolve to ignore weeks like this one. Yes, the cost of that insurance policy will cut into your future returns, but the net result should still be far greater than bailing out of the market altogether and earning almost no interest on your money. Most importantly, it will help you avoid the transaction costs and panicked trading losses that can put your portfolio through the wringer.