Monday, November 17, 2014

Are you prepared to ride the DJIA seesaw?

The often-mentioned Dow Jones Industrial Average (DJIA) is simply a basket of 30 domestic stocks that provide a barometer for the performance of the U.S. stock market. There are other measures, but the Dow is the one most frequently referenced.

In October, it appreciated a very respectable 2 percent. On the surface, you would likely say it was a decent month. On the other hand, it could have been a poster child for the phrase “investors need an iron stomach.” In other words, it was a really wild ride.

The stock market was open for trading on 23 days last month. As measured by the DJIA, the action was pretty evenly split. That is to say there were 12 days in which the market lost ground and 11 positive days that it gained.

Recently, the Dow has been hovering around the 17,000 mark, swinging above and below it with apparent ease. Historically, 17,000 is where no DJIA has ever gone before.

Generally, when the market is down 200 points in a day, you would consider it a really bad day. Conversely, when the market is up by more than 200 points in a day, you’d call it a really good day.

During the month of October, there were swings exceeding 200 points up or down on 19 of the 23 trading days. Clearly, it was not a time for the faint of heart.

Since we’re an automotive town, let me illustrate with an automotive analogy. If October were a stretch of road with the speed limit of 50 mph, we were either chugging along at 25 mph or flying at 70 mph.

Although we never actually traveled at 50 mph, we arrived at the end of the ride as if we had traveled all the way just a hair above the posted speed limit. On the surface it may have appeared to be an uneventful ride, but moment-by-moment it was wild and crazy.

Quite often, it’s best to simply tune out many of the world’s worrisome current events. Looking back at October, the Ebola virus was the dominant news story. But there was also ISIS and the bombings in Syria, tensions in Hong Kong, and tragedy with our neighbors in Canada.

Not to downplay any of these events, but history books are full of conflicts, crises and catastrophes that could be used to rationalize why you should avoid being an investor. And while history is no assurance of what lies ahead, time and time again the investment world seems to reward those investors who have an iron stomach and stay the course.

October was an absolutely perfect example. If you had let your emotions take hold, you would have missed out on a fairly respectable month. If you had watched the news on an hour-by-hour basis, you might have thought the world was ending.

There is a lesser-known index called the VIX, which measures volatility. It has often been referred to as the fear index. In non-technical terms, it was all over the charts in October, further confirming what a wild ride October was for investors.

I don’t recall ever experiencing a month quite like this past October. But it certainly reminded me why it’s so important to keep your emotions out of your investments.

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