Posted by Hartford Funds
When markets are volatile, staying invested can pay off.
Key Points
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When volatility rears its ugly head, our instinct is to take our money out of the market to safeguard it. However, history shows that rather than giving in to fear, staying invested and buying stocks during volatile times can be beneficial in the long run.
That analysis comes from examining the Cboe VIX, an index that measures volatility. It’s often referred to as the “fear index” because it gauges the market’s expectation of 30-day volatility. On average, the VIX measures around 20. But market-moving events, such as the initial outbreak of COVID-19, can quickly jolt it higher.
Fasten Your Seatbelts
If we step back and examine times when the VIX spiked above 40, indicating extremely high fear levels, there’s a trend (see page 2). Within three years of volatility-induced declines, the market not only recovered its losses, but also produced additional positive returns in each case. Five years later, those gains continued, too.
A takeaway, then, is that while volatility can be difficult to endure, it can present opportunities for long-term investors. When fear is high, it may be time to be contrarian: consider it an opportunity to not only stay invested, but to also buy while prices are depressed.
Why stay invested? Because it’s impossible to tell when the market will resume its upward course after a bout of volatility. So sticking around means participating in the recovery as soon as it happens, rather than waiting to see improvement and missing the early days of recovery.
Easier Said Than Done
We realize it’s easy to say volatility and market dips work themselves out in time, but it’s hard to live through. That’s why it’s critical to work with a financial professional who can tailor your portfolio to your personal risk tolerances. This can help you stay confident and be the contrarian who sees the opportunity in fear.
A financial professional can help you build a diversified portfolio so you can be confident during periods of volatility.
VIX, commonly referred to as the “Fear Index,” is the ticker symbol for the Chicago Board Options Exchange (Cboe) Volatility Index and measures the market’s expectation of 30-day volatility. VIX levels below 20 reflect complacency, while levels of 40 or higher reflect extremely high levels of volatility.
S&P 500 Index is a market capitalization-weighted price index composed of 500 widely held common stocks.
Dow Jones Industrial Average is an unmanaged, price-weighted index of 30 of the largest, most widely held stocks traded on the NYSE.
Important Risks: Investing involves risk, including the possible loss of principal. Diversification does not ensure a profit or protect against a loss in a declining market.
This information should not be considered investment advice or a recommendation to buy/sell any security. In addition, it does not take into account the specific investment objectives, tax and financial condition of any specific person. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. This material and/or its contents are current at the time of writing and are subject to change without notice.
Hartford Funds Distributors, LLC, Member FINRA. CCWP023_0222 227009
“When Fear Runs High, Time to Buy?” Hartford Funds, 2022, https://www.hartfordfunds.com/practice-management/client-conversations/when-fear-runs-high-time-to-buy.html.