Over recent days, most trading sessions have seen moves greater than +/-1% in U.S. markets, a level of volatility that is likely to continue. The VIX index, sometimes referred to as the stock market’s ‘fear gauge,’ has recently climbed well above its long-term average. While it may be tempting to sell risk assets when the ‘fear gauge’ is high, the chart below illustrates that some of the best one-year returns were during periods of heightened volatility.
We looked at what would happen if an investor sold out of the S&P 500 daily whenever the VIX surpassed 33.5 and then bought back in whenever the ‘fear gauge’ dipped back below that level. Since 1991, they would have underperformed a continually invested strategy by 2.3% a year. Periods of heightened fear have often been better for stock market investing than one might think. Investors should resist the urge to hit the panic button and instead stick to their financial plan.Geopolitical events can result in devastating consequences . Still, the impact on corporate revenues and profits is generally far less significant than Wall Street analysts sometimes predict. Markets have time and again proven to be resilient, bouncing back from geopolitical events quite quickly .
The best defense against these types of market events in the long term is a strategically diversified portfolio. A portfolio from global equities, to private infrastructure and real estate, and everything in between, is worthy of consideration.