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How concerned should an average investor be with the VIX indicator?

How much should a drop in the VIX impact my decision to invest in S&P stocks?

Jul 19, 2012 by Chris from Houston, TX in  |  Flag
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7 votes
Eric Level 17

The simple answer is if the VIX is high the S&P 500 has already experienced losses. Like most indices the VIX only tells you something after the fact. If you are relying on the VIX to give you an indication of when to make moves in the market you will probably be unhappy with your results. Instead use the VIX as an indicator of when buying protection is inexpensive. When the VIX is low and there are lots of issues on the horizon, it can mean the cost of buying puts is depressed, which can provide value when hedging a portfolio. Bottom line is the VIX is not an indicator that the average investor should worry about. The concept of investing in the S&P only when the VIX is low is flawed in the fact that it goes against the buy low and sell high golden rule. Hope this helps, but I recommend working with a fee based advisor that can give you better insight into your situation.

Comment   |  Flag   |  Jul 19, 2012 from Denver, CO

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Jesse Level 18

For the average investor a drop in the VIX should be no reason to avoid stocks. It simply means that investors in the options market are expecting less volatility in stocks going forward. There have been periods of time where the VIX stayed low for quite a while and stocks did quite well. Investors that avoided stocks during these periods missed out on significant gains. The 2004-2007 period is a great example of this.

Having said that, I believe the average investor would benefit from taking advantage of the times when the VIX is abnormally high (over 30). Adding to stock holdings on a monthly or weekly basis (dollar cost averaging) after the VIX surges can be a good way to "buy low" so long as it suits your personal investment philosophy and risk tolerance. Best of luck, Chris!

Comment   |  Flag   |  Jul 19, 2012 from Bend, OR

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3 votes

I agree with Eric. Find an advisor that works at a RIA. Determine a plan of action according to your values, goals and long term appetite for risk. Tune out the daily fluctuations and enjoy your family or other favorite activity.

Watch the following video. It highlights the Emotions of Investing in the markets.

http://www.brainshark.com/loringward/vu?pi=zCizZNOwFz0z0 Cycle Of Market Emotions www.brainshark.com

Thank you for your time. David G Niggel http://www.keywealthpartners.com

Comment   |  Flag   |  Jul 19, 2012 from Lititz, PA

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