Certainly we all deserved a break from the volatility (stock prices moving up and down) that we saw in 2008 and 2009, but this extended period of markets moving higher quietly seems to have made our memories of more typical market environments fade a bit. When market volatility returned in late August and early September of this year, it caught many investors off guard and caused some a lot of anxiety. The volatile season was kicked off by a very volatile day on August 24th when the Dow Jones industrial average opened down over 500 points and closed down over 1000 points for the day. However, this crazy day and rollercoaster week was followed by days that were actually more normal than they were abnormal where volatility was concerned.
While this may sound like an outlandish statement, volatility and particularly negative volatility (markets moving lower), had actually been at historically low levels for the last 32 months. The index that we use to measure market volatility is called the VIX – it measures the volatility of the S&P500 (the 500 most widely held US stocks by investors). In fact, from January 3, 2013 to August 21st of this year, the VIX for the most part moved between its lows of just above 10 to highs in the low twenties, with a few exceptions when it spiked for brief periods in October and December of 2014. Fast-forward to August 24th and the VIX peaked at over 53 and remained in the low 30s through the early part of September. If you look back at the VIX historically, you have to go all the way back to the early 1990s to see a multi-year period where there has been so little volatility similar to the one we had been living in prior to August 24th.
Understanding all of this, the most common question I get from clients is, “What should we do now?” The most crucial things to do are:
- Be sure that you have an investment plan that properly incorporates your long-term goals and your tolerance for risk.
- Be sure that you are properly and widely diversified.
- Be certain that you are not exposing yourself or your family to unnecessary risk.
- Buckle your seat belt, it is far more likely than unlikely that this bumpy ride will continue.
This article was written by and provided courtesy of Vaughan Scott, Senior Vice President – Investment Officer with Axiom Financial Strategies Group in New Albany, IN. Visit our website at www.AxiomFSG.com.