The past two weeks on the markets have seen a surge of volatility, with large gains offset by even larger losses. You could almost get whiplash watching the S&P 500 index swing throughout the day.
Much of this sudden volatility is caused by uncertainty: is our “soft landing” still in place, or are we heading towards a recession? Is large-scale war about to break out in the Middle East? Who is going to win the upcoming Presidential election that once again looks like a toss-up? Have we finally put the lid on inflation?
When this type of uncertainty shows up in the markets, it can be measured by the VIX volatility index, sometimes referred to as the “fear gauge”. This index marks short-term expectations for how much stock prices are likely to change; a high VIX reading indicates expectations for high volatility.
For the first 7 months of the year the VIX mostly stayed between 13 and 15, a relatively calm reading. In the beginning of August, the VIX suddenly jumped into the twenties and even spiked to a reading of 38 on August 5th. The election, war, worries of a recession and a general lack of certainty put investors on edge. On that same day, August 5th, the S&P 500 dropped 3%, which is a very large drop for a single day.
The obvious question is “what comes next”? Can we use this higher volatility reading to our advantage in our investment strategy?
Yes, but not as you might expect.
Every investor has what we in the business call a “risk tolerance”. This is your ability to stomach swings in the market—volatility—without too high a level of emotional entanglement. If your investment portfolio is invested with a level of risk that is in line with your risk tolerance, you won’t be inclined to panic and sell off your assets when the stock market drops. However, if your portfolio is too risky for your personal risk tolerance, you are more likely to sell out at exactly the worst possible time–right when the market drops hard.
Our recent bout of volatility is not a foolproof sign to buy or sell (although wouldn’t that be nice?). It is, however, a good test of the appropriateness of your current investment portfolio. If things feel more than a little uncomfortable, it may be a good time to consult with an expert and assess whether you are due for changes to your portfolio.
However you choose to protect yourself in times of market volatility, invest smartly and invest well!
Larry Sidney is a Zephyr Cove-based Investment Advisor Representative. Information is found at https://palisadeinvestments.com/ or by calling 775-299-4600 x702. This is not a solicitation to buy or sell securities. Clients may hold positions mentioned in this article. Past Performance does not guarantee future results. Consult your financial advisor before purchasing any security.