In market news, stocks fell sharply on Wednesday, down over -2.5%, but then rose over the remainder of the week and finished the week roughly flat.
In past updates, we have discussed the CBOE Volatility Index (VIX) which, as the name suggests, measures the volatility of the S&P 500. The VIX has been in use for about 30 years, with the value typically fluctuating between 10 and 80. Lower numbers represent lower volatility, and vice versa.
The following graph from Northern Trust shows that, since the financial crisis in 2008, markets have been consistently more volatile than the eight years prior:
Since 2008, the VIX has had a daily increase of 5 or more points a total of 56 times. Most of the time, when the VIX is up, the S&P 500 is down, so VIX spikes tend to correspond with S&P declines. This means that increases in volatility, along with stock market declines, have become commonplace over the past decade or so.
Here are some potential results higher volatility has on you and your portfolio:
- Expect Volatility – While we usually don’t know what will cause the market to go down, this data clearly shows that it will decline often. So you shouldn’t be surprised when it happens. Instead, prepare for it in advance.
- Cultivate Emotional Balance – Don’t get too excited after periods of attractive returns, and don’t get too depressed after periods of poor returns.
- Look for Opportunities – On one hand, stock markets are very difficult to predict in the short run. But on the other hand, they are also not entirely random. Typically, periods of poor performance are followed by periods of good performance; they are related. When markets decline, it provides opportunity to invest cash, increase stock allocation, rebalance current funds, or purchase other attractive funds.
Please reach out to me if you would like to discuss this further.