VIX Index Spiking to >25%
Why buying the dip could make a lot of sense
After a relatively quiet Q4, Q1 has been far more volatile for the stock market. While we don’t pay much attention to daily moves, volatility/fear is a perfect indicator to put more capital to work (if you want to). Yesterday, the VIX spiked to over 26%.
VIX Index - CNBC
We’ve already conducted research on the relationship between the VIX and forward returns, as shared last August. Transitioning from a low to higher VIX regime comes with some front-loaded return “pain”.
Now, we're not here to predict markets, but it’s interesting to focus on this type of information. Buying when the VIX is high minimizes the risk of future losses while maximizing absolute returns. Put another way, the pay-off is much more favorable.
In the end, we're all just human: volatility makes us nervous. Therefore, staying rational and holding relatively stable assets (incl. cash and cash equivalents) should eventually alleviate stress. Still, if we can optimize our portfolio rebalancing (i.e. if you have a mix of stocks, bonds/fixed income, cash, options strategies), we should welcome these insights.
Since the last major VIX spike, the S&P-500 is up 8-10%. Meanwhile, our portfolio is up 14.9%, and that’s on a time-weighted return basis. Our money-weighted return is a lot better, but it’s clear that we want both solid time-weighted and money-weighted returns. As much return consistency on as much capital as possible.
Our Portfolio Return - The Compounding Tortoise
It's difficult to predict what happens next after a VIX spike. Investors might sell their winners or stocks that had outperformed before the pullback and look to add to more speculative positions to play the rebound.
Anyway, let’s take a closer look at our portfolio’s current projected CAGR: do buying opportunities arise?