What Does The “Fear Index” Mean To You

We all believe we are rational, and not surprisingly we find, on examination, that thought is irrational. Possibly some are rational all the time but they are the few, no the many.

For investors there is an index for that. It is produced from data at the CBOE. It is the volatility index known more commonly as VIX. This is how it looks over the last 30 years.

The questions are:

  1. What is VIX?
  2. What does volatility mean to an investor?

What is VIX

You can see a quite extensive disusssion of VIX on investopedia. CBOE Volatility Index

In essence, it is the measure of the market’s expectation of 30-day forward-looking volatility. How people trade options is instructive. When fear is high, projected volatility is high.

What does it mean

Fear by itself is a negative indicator of future short run value and the VIX helps you put a number to it. The VIX is below 20 when things are going smoothly. Rationality seems to go out the door when it exceeds 30.

The VIX is presently above 40, so we must ask ourselves, is it smart to buy into an irrational market?

The economist and investor Keynes has some thoughts:

  1. “The market can stay irrational longer than you can stay solvent.”
  2. “Nothing is more suicidal than a rational investment policy in an irrational world”
  3. “Holders of quoted equities require much more nerve, patience, and fortitude than for the holders of wealth in other forms”
  4. “Nothing matters except states of mind, chiefly our own.”
  5. “Successful investing is anticipating the anticipations of others.”

Nothing there indicates that today is the day to buy.

What to do

As with most financial data, there is no truth in raw numbers, even in trends of a single variable. What matter is how it correlates to value over long times.  If you slept through all those spikes, would you be worse off? No one can consistently buy the bottoms and sell the tops. Success is a process and discipline and patience are the inputs.

There will be some who make vast sums by playing in the market while it is in its irrational state. I am happy for them, but it is a high risk game. Risk in this case means unrecoverable loss of capital. For example, by means of leveraged day trading or amateur options trading.

Irrationality is not your friend.

While the losses look as if we must do something, everyone else has the same thought and the ones that are doing something are making the overall situation worse. If you think you need the money for use in the next six months, may selling something now makes sense. If you do not need the money, you should notice how narrow the spikes in the chart have been.

Most of us should stay on the sidelines until there is a semblance of order.

With media attending to the Corona virus in hyperbolic detail, you cannot use the news to understand what is happening. The other problems include oil prices, Turkey, the pending US election.

From a narrower viewing point, this week includes the change to daylight saving time, a full moon, Friday the 13th, and the Ides of March.

It is hard enough to invest in an orderly market. Why play games where the only thing you know is how they keep score. The sidelines and the rules are moving randomly now and that should affect how you behave. Skill is of little value.

An old friend once opined regarding his business. “I don’t need to be first, but I would like to be the first to be right.”

Final thought.

Twitter post from @VijayKedia1: “Before beginning your career in the stock market, learn how to manage tension, otherwise you will be managed by hypertension.”

Faer is not a wise counsellor.

I help people understand and manage risk and other financial issues. To help them achieve and exceed their goals, I use tax efficiencies and design advantages. The result: more security, more efficient income, larger and more liquid estates.

Please be in touch if I can help you. don@moneyfyi.com 705-927-4770

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: