When Walt Disney World opened in Orlando Florida in 1971, the Dow Jones Industrial Average index also hit a yearly high of 950.82. Guests who visited Walt Disney World in 1971 had to buy ticket booklets. Tickets were needed to get on each ride, and different rides required different tickets. The ticket booklets contained tickets marked “A” through “E”, with more “A” tickets than any other ticket in the booklet. If I remember correctly, each booklet had just one “E” ticket. The “E” ticket was needed if you wanted to ride the newest and most popular ride they offered at the time. The newest and most exciting “E” ticket ride that I remember was Space Mountain, which opened in 1975. Back then, Space Mountain was the most thrilling roller coaster on the planet. Where else could you ride a roller coaster in the dark? The most exciting part of the ride was that riders never knew when and where the next drop or twist was going to happen. The next climb would continue until an unexpected drop would send them down, twisting and turning into the darkness. This darkness made it difficult for riders to anticipate the train’s next move.
Even though you may not have known what an “E” ticket ride was, I’m sure you are aware of the current volatility in the stock market. Lately, the market indexes seem to drop, then recover, and then fall even further. Some investors view the market with trepidation when they see a large drop by the number of points. These investors are typically referencing the Dow Jones Industrial Average index, commonly known as the DOW. However, when you track market movement by percentage rather than points alone, it can provide a better perspective of the overall market. For example, if the DOW falls from 32,600 to 32,100, this is a 500-point drop. In 1983, the Dow was valued at 1,000 points, so a 500-point drop represented a significant, 50% decline. In today’s DOW valuation of 32,000 points, a 500-point decline represents a much smaller 1.53% decline.
Psychology of Market Events
Each market event that creates an upwards or downwards swing in the DOW causes people to start paying attention. When the DOW is rising, people will often rush to add money into the market. When the DOW is dropping, the same people run to take their money out of the market. These investors who attempt to time the market do not realize they are on the same roller coaster ride. Each market event is simply a different section of the ride. Recently, we have had a very long upwards ride with the DOW growing from 03/16/2020 at 19,173 level to the 32,200 range in May of 2022.
The question people begin to ask is: “Should I get out of the market?” Just like riding Space Mountain in the dark, no one knows for certain what will happen next. However, after you have ridden the ride several times, you learn to anticipate the next sudden drop and twist. You can’t see it, but you know one is coming, so you learn to brace for the ever-unexpected drop and twist. After several rides, you get used to the drops and twists. Your reactions become more responsive, as you learn to reposition yourself for those unexpected twists and turns and the ever-unknowing drop.
During the Great Recession, the DOW went from 13,178 in 2007 to a low in 2009 of 8,885, a substantial 32.58% loss of 4,293 points. In 2008, you would have gotten different answers on the direction the DOW index was heading, depending on who you asked. Some analysts claimed the bottom was here and the market was heading upwards. Because we can look back, we know the market bottom was in 2009, not 2008. During these periods of market volatility, we need to maintain a disciplined approach to portfolio management. This disciplined approach includes repositioning the allocation to consider the current market conditions.
In 2007, we prepared our portfolios by removing bonds connected to mortgages, as we saw the weakness in that area. We participated in the 2008 bond recovery because we were correctly positioned for it. In 2021, we thought interest rates would be increasing, so we worked on lowering bond duration. Lowering duration prepared our portfolios to handle an increasing interest rate environment.
Re-Evaluate your Risk Tolerance
I sometimes miss the excitement that only comes with that youth-filled wonder as you experience unexpected drops, twists, and turns while riding a roller coaster in the dark. As all things change over time, so has the use of “E” tickets at Walt Disney World. Single ride tickets were phased out by 1982 when the passport became the norm with one entry fee. Today at Disney World, guests now wear Magic Bands that give them access to the park. Just as tickets change, our lives change, and so does our risk tolerance. This current market volatility is merely a bump in the investment journey of a young person. On the other hand, for a person nearing retirement or already retired, these market drops could impact their lifestyle choices.
Market events also act as a gut check to make sure your allocation is in line with your risk tolerance. I like to think of it this way: when I get in line for a roller coaster, am I prepared to ride it back to the station? If I am not willing to experience the ride, maybe I should look for a less volatile ride. As the ride concludes and you pull into the station, this is a good time to evaluate your thoughts. Do you think: “That was fun and I can’t wait to do it again!” or “I am so glad that’s over and I never want to experience that again.”?
What can you do?
You may wonder how you can prepare for market volatility. A good place to start is to know your cash flow needs, have an emergency fund, and review your investment allocation to make sure it is in line with your long-term goals. If you’re positioned correctly, you should not have to sell in the middle of the volatility, locking in those drops and only reentering when the market is back to its previous high. The approach of selling in the drop and buying during the recovery means you are selling low and buying high, which is not the goal of a long-term investor. If you need help reviewing these things, please let me know. You can reach me by calling our office at (717) 492-4787 or by email at email@example.com.
Bonds respond to interest rate increases based on their duration or the number of years untill the bond matures. The longer the duration the greater the movement. The best way to visualize this would be sitting on a seesaw. Sitting on the ends of a seesaw you get to experience the full movement of the up and down action. If you sit in the middle the motion is very minimal. The ends of a seesaw would equate to a thirty-year bond while the middle of the seesaw would equate to an ultra-short bond that matures in about one year.
Background on the DOW: The Dow Jones Industrial Average original index was created in 1885 as a way to track the overall stock market. The index was started by Charles Dow who personally selected 12 stocks that he thought represented the overall market. There are 30 different companies in the DOW since the great depression and they continue to maintain 30 different companies today. The index is updated periodically by the DOW committee (S&P Dow Jones Indices). It is a price-weighted index meaning that more weighting in the index is based on the size of the company compared to an equal weight where every company has the same weighting in the index.
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