What is going on with the markets? You may have noticed recently that stock and bond markets have suddenly become more volatile, more prone to ups and downs. Until recently, volatility has been at an all-time low. How do we measure it objectively? Well, most of us are aware that the US markets recently dropped by more than 10 percent. The objective measurement, or the best one we have, is an obscure index called the VIX, sometimes referred to as the “investor fear index.” The VIX measures volatility by gauging interest in options that investors buy or sell to protect themselves from market ups and downs.
Though not perfect, it is the best measurement we have for understanding volatility and market risk. Interestingly, some investors bet that low volatility is here to stay and that may be one factor in the market’s recent downturn. When so many investors tried to pile into this low volatility prediction, something had to give. (Think college students piling into a VW Beetle.) When investors started trying to get out of this trade, the exits were suddenly blocked, inducing panic.
So, what else caused the downturn? We are still figuring that out, and here are a few things to consider:
The list above demonstrates just a few factors. Many of the factors that caused the correction may remain unknown. So, what do you do? Let’s start with what not to do. Don’t panic. Don’t sell everything you have in your 401k or other investment account and put it in cash or money market or gold or Bitcoin or bury it in the backyard. Why? Because you compound the losses by selling when everyone else does and not getting a fair price when you sell. Think about trying to sell your home in 2007-08. Then you are on the sidelines when the market goes up so you miss the recovery. This is the double whammy of panic selling. Also, investors often sit on the sidelines for a long time before re-entering the market until the market looks safe again. This may be exactly the wrong time, setting you up for another sell-off. This is one of the main reasons many investors fail to earn the return that stocks provide. They get in and out of the markets and make things worse.
Take this as an opportunity to take stock, so to speak, in your investment strategy. Did the market downturn keep you up at night wondering if you would be able to retire when you want, send your children to the school they got into, or take that vacation you were looking forward to? If you answered yes, let’s reassess your situation. If this last market downturn made you nervous, reduce your risk, but do so carefully and thoughtfully. Many of us fear missing out on the markets and put more in stocks than we should. Tales at cocktail parties of how much so and so made on their investment in FAANG stocks (journalistic lingo for Facebook, Amazon, Apple, Netflix, and Google) are probably overblown. Also, people rarely tell you about the stocks they bought that didn’t do so well. Turn off the noise in media and at your neighborhood watering hole and develop your own strategy, one that works for you and allows you to sleep at night. If we can help, please reach out to us. We do have a tool that evaluates your appropriate level of risk, and you are welcome to use it without cost. Just ask us how.
The information provided is for guidance and informational purposes only. The articles are not the opinions of ProCore Advisors, LLC.