These are the times that try investors’ souls, pinch their wallets and raise questions about what constitutes sound thinking on investment strategy.
No, we don’t have definitive answers, but we can at least take a stab at dispensing some perspective, albeit informed by limited information that afflicts the mortal senses. With that caveat out of the way, perspective starts with the fact that volatility, as much as it scares us, is a good thing for strategic-minded investors. And the market has been nothing of late if not volatile.
The VIX index, a measure of S&P 500’s price volatility, has taken wing in recent weeks, effectively tripling from its close at the end of last year, as the chart below illustrates. Dramatic as the new trend is, the resurrection of risk isn’t all that surprising.
This past January we asked: Is Volatility Set for a Comeback? At the time, pondering a future of revived risk was widely dismissed as misguided ramblings. The bulls, you may recall, were then basking in a rare state of total control over asset classes. Everything had been rising for five years or more, and in the process price volatility fell sharply. The markets, in short, were priced for perfection, as they say. The fact that the perfection came after five years of fun suggested that it was time to prepare for something else. The timing and catalyst that would usher in change were still mysteries in January 2007. But the future seemed clear for those who believed that risk can’t stumble and stay abnormally low forever.