Investors watching their portfolios recently, on an hourly, daily or even monthly basis, have probably seen their investments gyrate like a yoyo, moving anywhere from a few basis points to double-digit losses or gains. That’s fear for you! And there’s a technical measure that puts actual numbers to that fear – it’s called the Volatility Index (VIX), and which is more widely known as the Fear Index.
Not to be overly technical, but what the VIX does is to measure the amount of volatility that’s expected in the markets in near future (30-days out). It does so by using a set of algorithms that factor in the frequency and magnitude of fluctuating prices. Understanding that volatility can be a great step towards helping you manage your portfolio in times of extraordinary volatility – as we are experiencing today.
Investing in volatile markets
The art of surviving volatile markets isn’t about getting in and getting out at the right time. It’s a fool’s game to try and time your investments to coincide with “favourable” volatility. Success comes to those that stay invested despite volatility – as our chart demonstrates.
If you look at how the S&P 500 and the NYSE Composite indices have performed over the long haul, their trajectory as been on the upswing. Sure, there have been downs – notably during the 2008-09 financial crisis; but if you stayed invested, you were rewarded.
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Since 2003, your investments in the S&P would have been up by nearly 180%, with NYSE investments yielding you almost 134%. During this time, we’ve seen the VIX close as low as 9.14 (Nov 3, 2017) to as high as 80.86 (Nov 20, 2008) during the financial crisis.
The bottom line about investing in volatile times is: If you let volatility drive you out of the market when it spikes, chances are that your investments will take much longer to recover from a downslide.
Volatility survival guide
If there is one big secret to surviving in volatile markets, it’s this: There is none!
Having said that, however, there are certain things that you can do in order to weather a volatile storm on the investment seas. Here are a few of them:
a) Do your homework: This piece of advice is the same, whether you invest in up, down, side-ways or volatile markets. However, volatile times require extra diligence when picking investments, because their performance (either up or down) might be masked by volatility.
b) Buy the dips: If you walked into an investment based on strong technicals and fundamentals, then don’t let the gyrations in the Fear Index scare you. Volatility doesn’t destroy an investment – company fundamentals do that! So, unless something has changed fundamentally in your investment thesis – continue to use volatility as a buying opportunity.
c) Expand your buying horizon: As we’ll see later (in our long-term VIX chart below), volatility persists throughout the long-term investment horizon – and that’s where opportunities exist. Instead of investing once a year – using that $12,00 annual bonus – try investing $100 each month. You’ll be able to dollar-cost average into your position, and also take advantage of long-term volatility in the process.
d) Don’t micro manage – Macro manage instead! This simply means that you shouldn’t watch your portfolio on an hourly, daily or monthly basis – unless you are an active trader! Instead, if you are a long-term investor, look at the macro picture. For instance: Reduce REIT positions if interest rates start climbing too quickly; Up your stakes in U.S Energy/Big Oil if there are political/military headwinds in the Middle East.
As you can see, there’s no real secret sauce to successfully navigating volatile markets. However, volatile times do call for extra diligence, just in case the bigger picture does call for a response to swings in your portfolio’s performance.