Discipline is the way that I live
To mankind I’ve much to give
Won’t let you bring me down
I’ll knock you out within one round

--Mind of Substance, “Discipline”

Being that we now have entered the final month of the year, I thought it would be an appropriate time to begin getting you ready for what I suspect will be both a challenging and rewarding year ahead in the equity markets. But rather than give you a predictive outlook on what’s likely to happen in 2011, I want to take a step back and look at the lessons we’ve learned in this very volatile, very eventful year.

Over the next several weeks, we’ll be taking a closer look at several of those lessons, and this week, we’ll take a look at what could be the most important lesson learned in any market year -- the importance of discipline when investing in a volatile market.

The need for extreme discipline when investing is even greater in the face of extreme market flux. To illustrate just what I mean by extreme market flux, just take a look at the chart below of the S&P 500 Index. Here we can really see the extreme peaks and valleys we’ve experienced so far this year.

We started off 2010 on the back of a very nice surge in December 2009. Then, midway through January, we witnessed a sharp pullback of 7.2% that lasted until early February. Buyers stepped in forcefully after that initial sell-off and, by late April, the broad measure of the domestic equity market had surged some 13.8% off of its February low.

Of course, the 2010 year of volatility wasn’t nearly finished yet, and in May, we saw a huge sell-off precipitated by the May 6 “Flash Crash,” where we witnessed the Dow’s largest intraday decline in history. The shock was temporary, thankfully, and the market recovered much of those losses within minutes. However, the downbeat tone definitely had been set. Save for a bit of buying in early June, stocks basically continued falling until they slid to their 2010 low in early July.

Then, the decline in stocks to just over 1,020 on the S&P 500 Index (SPX) proved to be too tempting to buyers, and that’s when the new equity surge began in earnest. From early July until early August, we saw a 9.8% spike in the index. Once again, sellers stepped in, lopping off 6.1% from the S&P’s value by the end of that month. After that, the real volatility began!

In September, stocks began a seriously bullish run that took SPX up 16.8% in just over three months. Stocks reached their peak in early November, just after the midterm Congressional election and right after the Federal Reserve’s announcement of quantitative easing part II, or QE2.

Since a November peak, stocks have pulled back about 4% (as of Nov. 30). But we don’t yet know where this decline ultimately will settle. My suspicion is that we will continue to see more ebb and flow heading into the final weeks of the year. After all, a volatile December would be a fitting end to this volatile year.

Having detailed the extreme volatility in 2010, I think you can understand why the biggest lesson learned in 2010 is the virtue of discipline.

So many market participants got caught up in the wild ride that they bought at the peak and sold at the trough. They chased performance after the gains were already made, and they sold right as stocks tanked. This is called being reactive to the market, and it’s most definitely not the rational way to manage your serious money.

The better way is to make strategic buying decisions when the market first breaches critical technical levels, and selling those positions once they begin to break down. This is easier said than done, I realize. But armed with firm buy and sell triggers, you can remain proactive and in control of your investing destiny -- and that’s a timeless lesson for any market year.