200-Point Daily Moves in the Dow Jones Industrials are in Your Future

Think you're ready for volatility? Think again.

Jun 26, 2014 at 1:30PM
Longview

The Dow Jones Industrials (DJINDICES:^DJI) was down 38 points as of 1:30 p.m. EDT, recouping much of the ground lost earlier in the day. Most market participants blamed the drop on concerns about just how quickly the Federal Reserve could raise interest rates, as well as data suggesting that consumers last month were somewhat less willing to spend than most had expected. Yet as much as news of an opening "triple-digit plunge" for the Dow Jones Industrials might inspire fear among investors, you should prepare for a future in which 200-point moves for the index become commonplace.

File
Image source: Victor Bezrukov, commons.wikimedia.org.

A return to volatility
For years, investors have been waiting for volatility to return to the Dow Jones Industrials and other market benchmarks. Measures such as the S&P Volatility Index (VOLATILITYINDICES:^VIX) have defied expectations by remaining at rock-bottom levels, crushing investors in the iPath S&P 500 VIX ST Futures ETN (NYSEMKT:VXX) and other volatility-tracking investments. Indeed, the iPath ETN has lost almost two-thirds of its value in the past year alone as markets have defied predictions of much larger fluctuations.

^VIX Chart

Volatility data by YCharts.

Yet as potential hot-button issues start to mount, a return to volatility at some point in the future seems inevitable. When it happens, you need to be ready for the consequences on your investing strategy and your overall temperament.

The next normal?
For some guidance, turn back the clock to 2003. At that time, the market was just exiting a two-year bear plunge, with the tech bubble's burst and the Sept. 11 attacks having helped send the Dow Jones Industrials sharply lower from its highs just a few years before. Uncertainty about the war in Iraq made investors nervous about the immediate future, let alone the Dow's long-term prospects.

During the first quarter of 2003, the S&P 500 (SNPINDEX:^GSPC) moved by 1% or more on almost half of all trading days. For the Nasdaq Composite, the figure was more than 55%. What's particularly remarkable about the Nasdaq figure is that it was the lowest level for 1% moves in four years, down from a peak of 85% in the second quarter of 2000.

When you compare those numbers to what we've seen from the Dow Jones Industrials lately, the contrast is striking. Since the beginning of the second quarter of 2014, we've only had four 1% moves in the blue-chip index, or less than 7%.

Of course, the Dow won't necessarily become as volatile as it was in 2003. But with the potential for new military conflict in Iraq, as well as other geopolitical hot spots around the world, there's no shortage of uncertainty about the future of the global economy. Even if volatility moved only part of the way back toward its former levels, 200-point single-day Dow moves could easily become a weekly occurrence -- or even happen more frequently if the aging bull market gives way to a more turbulent period for the stock market. Dow investors need to get comfortable with that now, adjusting your emotions to handle what could look like a very rocky time ahead.

Warren Buffett: This new technology is a "real threat"
At the recent Berkshire Hathaway annual meeting, Warren Buffett admitted this emerging technology is threatening his biggest cash-cow. While Buffett shakes in his billionaire-boots, only a few investors are embracing this new market which experts say will be worth over $2 trillion. Find out how you can cash in on this technology before the crowd catches on, by jumping onto one company that could get you the biggest piece of the action. Click here to access a FREE investor alert on the company we're calling the "brains behind" the technology.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers