My partner, Don, is a really good investor. He began saving money from his childhood paper route. And over the years, he has actively participated in his previous employers’ 401(k) plans, and later, his self-administered IRA.

Today, he’s a successful, self-taught investor, focusing his investments on fundamentally strong companies in growing industries. He has never worried too much about market volatility or cycles because he was investing for the long-term — until now.

Lately, he’s been on a tear, ranting about the incredible volatility roiling U.S. markets, thanks to the European debt crisis, and how that volatility is buffeting his portfolio. His gripe: “I don’t care about Europe, and even less about Greece. And I don’t understand why what goes on 5,700 miles away can so violently disrupt our markets!”

I hated to be the bearer of bad news, but I told him: “Get used to it!”

Just as the old “buy and hold” strategy for investing has gone the way of dinosaurs, investors must realize that expecting the U.S. stock markets to continue behaving as if they’re the only game in town is also an extinct proposition.

Although the Greek economy is ranked 39th in the world in terms of GDP purchasing parity and contributes just 2% of the European Union’s GDP, investors’ biggest concern with the possibility of a Greek debt default was “contagion” — the fear that Greece’s problems would spread to the rest of the European Union.

And that’s no small concern. The PIIGS (Portugal, Ireland, Italy, Greece and Spain) have all been suffering similar debt distress. And now that Greece’s problems — at least temporarily — seem to be on the mend, the focus is now on Italy and Spain, which account for about 20% of EU GDP. Should their situations worsen, the impact will slam U.S. markets much more than Greece’s problems.

That’s because the U.S. is considerably tied to Europe. The U.S. is now the second-largest economy, after the combined EU, according to the CIA – The World Factbook, which points out that:

• America’s largest trading partner is — guess who — the EU. Europeans purchase about 14%, or $1.3 trillion, in goods and services from our country’s largest 500 companies every year. Any drop in employment over there slows consumer spending, which in turn crimps the profits of U.S. companies that sell into Europe.
• The U.S. owns approximately $18 billion of Europe’s sovereign debt, which isn’t a huge amount, relatively speaking. But any defaults would have hit U.S. investors.
• U.S. ownership of private sector European securities is about $70 billion, so any ratings downgrades or bankruptcies due to credit problems will affect the prices of those securities, reducing the gains and increasing losses to U.S. investors.
• According to Fitch Ratings, some 50% of the assets of the top 10 prime money-market funds in the U.S. are invested in European bank securities, which could create enormous problems and even failures at the funds if the European bank crisis worsen

And with growth forecasts of just 0.05% for the euro zone next year, no wonder investors are frightened by Europe’s financial woes.

So What’s an Investor to Do?

My advice to Don and to you is threefold:

I recommend that you limit your exposure to multinational firms with a large portion of their sales to Europe. The same goes for your mutual funds and exchange-traded funds.

My research tells me that the sectors that the crisis will most affect are retail, technology, pharmaceutical and medical supplies. You can look in your companies’ 10K to find out just how much exposure they have to Europe and to these sectors.

I’m still a believer in investing for the long term, but I also believe in protecting your portfolio. In today’s markets, this requires a strategy that includes global considerations, a more-frequent monitoring of your holdings and buying and selling your stocks more often.

My years of experience have shown me that you can’t fight the market. No matter how good the company is in which you invest, extrinsic factors can deeply affect its valuation. If the momentum is going against your stock, it’s most likely going to continue for a while, so just cut your losses and get out. You can always buy back in when the scenario improves.

And very important: Most investors will sleep better at night by using stop-loss protection, ranging from 30% for aggressive investors to 10%-15% for more moderate and conservative folks.

The markets had a good run last week, but remember, we live in a 24/7 era of news coverage, and no matter if that coverage is often lacking in facts, steeped in rumors or overexaggerated, it still affects the actions of nervous investors.

So, rule #1 — protect yourself!