The week just gone has provided a real and stark example of the importance of staying invested despite the ups and downs of the markets. Does the rise in markets mean that the worst of the ‘second crisis’ is over?, I have no idea, nor does anyone else for that matter, even though some were telling us no more than a few short weeks ago of impending global doom!.
This week has seen the Australian share market rebound a stunning 7.5% in 4 days whilst overseas markets have also bounced with the U.S. S&P500 up just over 5% in 4 days. As we closed out the September quarter few would have thought that this kind of rise was possible and many were saying that it was time for people to cash out and wait on the sidelines until things settled down. I have previously written about the effect missing the best days in a bull market can have on your potfolio and whilst we don’t know where the market will go from here, the past 3 or 4 days could be one of those days and if you weren’t invested you cant get it back now.
History however shows that when people are at their most fearful however, is often the best time to invest. We don’t recommend that clients try and time the market, rather in times of volatility like this we recommend a dollar cost averaging approach over a minimum of 6 months, however another measure some use is the Board Options Exchange Volatility Index, otherwise known as the VIX. The VIX measures the market’s expectation of stock market volatility over the next 30 day period and is often referred to as the Fear index.
Bloomberg recently compiled some data going back to the start of 1990 when the index began which produced some pretty interesting results. Since its inception in 1990 the VIX has closed above 40 a total of 166 times. After adjusting for periods when it fluctuated around that level over 30 days, the 12 month return on the S&P500 has been 19%. That is, every time people become extremely fearful the market has risen almost 20% each time.
Last week the VIX was as high as 45 and this week the S&P has rallied 5% and the ASX200 7.5%. Of course we won’t know if this pattern will repeat again, however by any measure stocks are very cheap. Bond yeilds in the U.S are paying 1.75% with the potential for falling capital values compared to stocks which are yielding over 2% with the posibility of rising capital.
Fear is a very powerful tool, particularly for those using it to encourage you to buy or sell something, from which they derive an income. However a smart investor will look through the fear, look at the long term and focus only on the things they can control.
After all, the only thing we have to fear is fear itself.
Article first published as The Only Thing We Have To Fear Is Fear Itself on Technorati.