The Case for Staying Calm and Continuing with Your Plan, Even If Everyone Around You Is Reacting to Fear

Each year thousands of people pay to have a picture taken of themselves screaming in abject fear. It's on Disneyland's popular Splash Mountain ride.

The moment of terror comes near the end of the ride when the gondola (shaped like a hollow log) suddenly plunges down a waterfall. The instant it reaches peak velocity a camera snaps a picture, catching the passengers' terrified faces.1

You don't have to be a psychologist to recognize that when the average person experiences an unexpected drop of more than a few feet, they instinctively react with fear. Even if they know the ride has operated safely for more than thirty years, and an unexpected drop is coming.

The stock market has its own method for taking a snapshot of frightened people. It's called the Cboe Volatility Index (Vix). And while it doesn't record the faces of anxious investors, it does track something just as concrete-their fear-induced transactions.2

When speculation is running rampant around some highly anticipated event, such as the current election, the Vix will reflect the increased price volatility as jittery investors seek a way to mitigate their losses in the event their fear becomes reality.

History, as usual, gives us some good examples of how this dynamic usually plays out.

In the run up to the 2000 election, polls were indicating that it would be a close contest between George Bush and Al Gore. And in the weeks just before the vote when it looked like the result would not be a foregone conclusion, the Vix began to spike.3

But after Bush was declared the winner, market volatility dropped, and things generally got back to normal.

In fact, looking back further from 1860 through 2019, the average S&P 500 Index overall volatility averages 15.7%. During the same period but looking at just the 100 days before and after a presidential election, the average is closer to 13.8% (contrary to what might be popular thought).

Remember that averages are formed by whatever you're measuring spending time both ABOVE and BELOW a certain point. As we enter the 4th quarter of 2020, many may view a climb in the Vix (if it occurs) would be being fueled by another close election paired with the unknowns of the pandemic. Not surprisingly, the reality is that investors in times of turmoil are giving in to their gut emotions.

Back to our Splash Mountain example.

You can find thousands of pictures online of the screaming log flume riders. However, there's a relatively rare variety of this picture that gets shared and reshared on social media. In these photos one or more of the riders have calm--almost bored--expressions. This contrast with the often-hysterical faces of those beside them is what makes these photos so amusing.

But it also serves as an example of how someone can choose to respond calmly even as their equilibrium is urging them to react.

When you get onto the Splash Mountain ride, you know beforehand there will be twists and turns and more than a few drops. The same is true when you invest in the stock market.

Yet many people respond as if this market volatility were completely out of the ordinary, and in response to short-term uncertainty take what they believe to be evasive measures. Some go so far as to "jump out of the ride," abandoning their 20 or 30-year strategy for the current perceived safety of cash.

Knowing that volatility is built into a free market, the prudent investor will decide ahead of time to ignore their short-term fear, keep their calm, and continue working their plan.

If you have concerns about how recent volatility may be affecting your chances for retirement success, please reach out to us.

Sources:

1. https://en.wikiQedia.org/wiki/SQlash Mountain

2. http://www.cboe.com/Qroducts/vix-index-volatili!y/volatilitY.-indexes

3. https:/ lwww.wsj.com/articles/stocks-tY.QicallY.-climb-regardless-of-whos-in-the-white-house-11603445400

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