Many of us invest in stocks for their ability to grow our wealth. So 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,1 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 events can quickly jolt it higher.
For example, in late February 2020, the initial US outbreak of the coronavirus pandemic pushed stocks down into bear market territory in record time. In March of 2020, continued fear sent the VIX soaring to a new record, surpassing the previous high set during the Global Financial Crisis.
Fasten Your Seatbelts
Volatility is, by definition, a rapid and unpredictable change. And when that change is downward, it’s not an enjoyable experience. But there’s something to be said about staying the course despite the discomfort.
And if we step back and examine previous VIX spikes above 40 that indicated extremely high fear levels, there’s a trend. 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 the broad sentiment is fear and others are selling, it may be time to be contrarian: consider it an opportunity to not only stay invested, but to buy while prices are depressed.