Stock market volatility has remained elevated through the first half of April. In fact, we can quantify the current level of volatility and compare it to historical readings by using the Chicago Board of Options Exchange Volatility Index – also known as the VIX. Here is a graph of VIX closing prices for each week of the last 30 years:
Higher numbers in the VIX correspond to higher levels of market chaos and turbulence, generally oscillating between 10 and 80. The green line in the chart above is at 50. As a reference point, on April 7th, the VIX rose briefly to 60, but fell back into the 30s by the end of the week.
What can we learn from this historical data on the VIX?
- Fear can be a natural side effect of investing: to achieve higher returns, we take on more risk. By looking into the past, we can see that markets have always rebounded from losses and gone higher. On the other hand, we don’t know the future, so risk means we are never quite sure how the current concerns will resolve.
- Large spikes in volatility are typically short-lived. During the financial crisis in 2008, the VIX stayed above 50 for less than 3 months. During the onset of COVID-19 in 2020, it was 3 weeks. Historically, the scariest moments don’t last for very long.
- Investors are best served by focusing on what they can control, and by recognizing what they can’t. We cannot control if the next tariff will be added or removed, but we can control our investment allocation. We can also control our trading decisions – if prices fall, we can decide whether we want to sell or buy. Luckily, the decisions under our control are what determine our results in the long run, so it’s important that we make wise, measured, and logical decisions that give us the best chance for success.
- The scariest times are the best times to buy. Looking back, the financial crisis of 2008 and the bear market of 2020 were fantastic buying opportunities to embrace. Paradoxically, the best time to buy is when you most feel like selling. Adding additional cash or rebalancing your portfolio are both tactics that help you buy when prices are low.
- Your portfolio is not just the S&P 500. You have a diverse allocation of investments, all performing differently in the current environment. Your accounts will not always reflect what is happening on financial television and news networks.
Please reach out to us if you would like to discuss current markets and your investments in greater detail. We appreciate the trust you have placed in our team.
