Today as I write this the VIX Volatility Index is a bit above 45. As you are well aware, the stock market has been extremely volatile over the past several weeks and the 45 reading on the VIX Index reflects that level of volatility. In late January, the VIX was hovering at around 12.5, as a point of reference.
What Does VIX 45 Mean?
VIX at 45 means that the market is saying there is a 68% or 1 standard deviation of a likelihood that the stock market will be either up or down by 45% over the next year. For a monthly prediction, take the square root of 45, which is 6.7, so the market believes there is a 68% likelihood that the index will go up or down by 6.7% over the next 30 days. In this environment, it seems anything is possible, and so a price change of these magnitudes is certainly not out of the question. 45% up in 12 months sounds wonderful, but 45% down does not. That’s the world we are living in now, and we need to be prepared to operate within this new world.
In my opinion, the worst thing you can do during heightened volatility is to panic. Don’t sell when everyone else is selling, and don’t buy when everyone else is buying. Be consistent with your investment plan and stay the course. Better yet, use these down days as a buying opportunity – maybe not chips all-in, but some of your chips. This volatility is largely due to the Covid-19 threat. Eventually, Covid-19 will abate or even go away and we likely will go back to business as usual.
Having a solid investment plan and sticking to it is even more important during increased volatility as we are currently having. If there is a 68% probability that the stock market will swing 45% in either direction, it will be steady, long-term investors that will bring the VIX down back to reality. Make sure you understand your own investment rules and stick to them, especially now. I know, easy to say but not so easy to do. But try to remain calm as best as you can.