How the Roller Coaster Analogy Helps Explain Volatility

“The stock market is like a roller coaster.”  You’ve heard that one before.  It has it’s ups and downs.  The expression might sound trivial, but the analogy can help you explain lots of points to clients and prospects.

  1. Roller coasters start and end in the same place.  This isn’t strictly true for the stock market, but when the market rises (everyone’s euphoric) then it drops (everyone is anxious) and then it recovers.  You’ve seen weeks where the market soars and plunges, ending the week little changed.  It doesn’t always work that way, but some people will think about a recent week’s market action and say “aha.”
  2. Roller coasters operate in cycles.  You go up, up, up and them down, down, down.  As you approach the ride, you can see the track has peaks vand troughs.  Unfortunately, with the stock market, you don’t see them ahead of time.
  3. The drops are always scary.  Few people worry during the ascent.  It’s when you reach the peak and the track heads into a sharp decline that everyone starts screaming.  Yes, the stock market is like that.
  4. The rise in the roller coaster is usually slower than the decline.  This aligns with the expression “The stock market goes up like an escalator and down like an elevator.”  The rises often take place gradually over time, the drops are sharp, must like a roller coaster.
  5. No tree grows to the sky.  With a roller coaster, the ride doesn’t keep climbing forever.  Eventually it stops going up and starts coming down.  The stock market usually behaves the same way.  It’s the cyclical nature of the market.
  6. Don’t eat lunch beforehand.  Children and parents learn early in life you get on the wildest rides before you put food in your stomach.  You don’t want to get an upset stomach during while on the ride.  The stock market equivalent is consider investing as a long term strategy.  If you need money for your child’s school tuition in six months, don’t put that money into the market.  If the market goes down and stays down, you would be losing money when you sold to pay the tuition bill.
  7. Don’t jump out.  The ride goes up.  Then it plunges down.  If you decided “I’ve had enough,” unbuckled your harness and jumped off the ride, you would get hurt.  If you believe the stock market moves in cycles, selling out during a decline might mean you lose money and miss the (hoped for) recovery.  It’s not an exact analogy, but it describes panic selling.
  8. Falling off the rails.  Accidents happen on roller coasters.  The ride malfunctions, people get hurt.  There are times the stock market doesn’t perform as expected.  It goes down and stays down for years.  These things happen.  There is a probability.  The roller coaster operates in a safe manner the majority of the time.  But there’s always a chance it won’t.
  9. Seat belts.  You are strapped into a roller coaster.  The operator takers steps to keep you safe, reducing the risk of accidents or bodily harm.  The stock market equivalent might be asset allocation.  Also, having a financial advisor sitting beside you.
  10. Pay to play.  The operator of the roller coaster doesn’t let you ride for free.  You buy a ticket.  You might buy a day pass upon admission allowing you unlimited rides, but you are still paying.  When you invest in the stock market, the brokerage firm or online investing application is making money.  No one is giving you a free ride.

The roller coaster analogy might help you explain volatility to clients, giving them an “aha” moment.

Related: What Would You Do If Your Biggest Client Left?