It’s amaz­ing that peo­ple will pay good mon­ey to be scared out of their wits on a thriller-ride roller coast­er, and some of the ride expe­ri­ences seem to be over the top.  Check out this coast­er expe­ri­ence in Chi­na:

Par­tic­i­pat­ing in the invest­ment mar­kets is some­times described as rid­ing a roller coast­er, and the anal­o­gy is not far off base.  The more the mar­ket lurch­es, the scari­er it is, and the great­est fear is gen­er­at­ed when the port­fo­lio sud­den­ly takes you over a steep decline.  What makes the anal­o­gy even more apt is the way invest­ment charts are nor­mal­ly pre­sent­ed, with the price bounc­ing up and down each day.

But the third quar­ter of this year took the expe­ri­ence to a new level–to a degree that even some of our pro­fes­sion­al col­leagues haven’t yet com­plete­ly real­ized.  Look at the two charts below; the first tracks this year’s price move­ments of the most basic stock mar­ket index, the Stan­dard & Poors 500 index of larg­er U.S. com­pa­nies.  The ride was pro­ceed­ing nice­ly, per­haps a lit­tle bumpi­ly, until toward the mid­dle of the sum­mer, when large cap stocks sud­den­ly went into a free-fall com­pa­ra­ble to the Tow­er of Ter­ror at the Dis­ney­land theme park.  After that, the trip was incred­i­bly bumpy both up and down, mak­ing it treach­er­ous for any­one who was try­ing to trade out of a down­turn (miss­ing all those sud­den updrafts).

The sec­ond chart shows the VIX index, which sim­ply mea­sures how volatile the S&P 500 is at any giv­en time.  High­er num­bers indi­cate a bumpi­er ride, and you can see that the third quar­ter was remark­ably more volatile than the first half of the year. 

How long will our present volatil­i­ty con­tin­ue?  Prob­a­bly not for­ev­er; his­to­ry shows that the herd of investors gets spooked, then calms down a bit, then gets spooked all over again with sur­pris­ing reg­u­lar­i­ty.  This last graph shows the move­ments of the VIX since incep­tion in the sum­mer of 2007; the spikes look almost like a slight­ly-irreg­u­lar heart­beat, with the big one com­ing in the last three months of 2008, fol­lowed by scary bumps in the roller coast­er in the sum­mer of 2010 and the quar­ter just end­ed.

This graph may or may not give us a win­dow into the future–the next heart­beat will be unpre­dictable.  But if the past is any indi­ca­tion, just like the rides at the local amuse­ment park, the mar­kets will take us through some smooth peri­ods, and then sud­den­ly give us a good scare all over again.  This is the per­verse nature of the invest­ment mar­kets; they scare the heck out of you, as if they’re try­ing to con­vince you to jump off the ride, and then they pro­vide an unex­pect­ed peri­od of nice returns to those few who were brave enough to stay on the track.