“From the Desk of Michael Sheldon, CIO”
Looking back, 2018 was a challenging year marked by a pick in volatility compared with what we experienced in 2017. We have discussed reasons for the change in market behavior in past RDM Market Updates. In this RDM Blog, we wanted to briefly explain what is meant by the term volatility and how it is measured. There is a lot of complex math behind the actual VIX Volatility Index equation but in this update, the goal is to provide a broad overview so nobody should worry if they do not have a degree in statistics.
The word “volatility” is mentioned a lot in financial markets but what does it really mean when someone says the “VIX Volatility Index” rose or fell on a given day? Volatility measures the frequency and magnitude of price movements, both up and down, that the market experiences over a certain time period (usually measured on a daily basis). The higher the level of volatility, the greater the price swings in the underlying index. The VIX Volatility Index is actually calculated based on changes in the prices of underlying put and call options for the S & P 500 index that have on average about 30 days until maturity (source: CBOE).
In 2017, we experienced a total of 8 days when the market fell by 1% or more (4 days on the upside and 4 days on the downside (see chart below – source: Fidelity). Last year, the market experienced 32 up days of 1% or more and 32 down days of 1% or more per year. For comparison, since 1950, we have averaged 51 days when the market rose or fell by 1% or more. The point is that while 2018 represented a large change from the low volatility levels we experienced in 2017, 2018 is more in line with the kind of volatility investors should expect to experience in any given year.
While we currently believe the odds of a recession are fairly low for this year, as the current economic expansion continues to mature, it’s only fair to assume that volatility in the period ahead will likely be more in line with historical trends than what we witnessed in 2017. Having the appropriate asset allocation, being diversified between stocks, fixed income assets (and possibly alternative investments) and thinking about investments utilizing a multi-year time frame should help you ride the inevitable ups and downs that come with investing in equity markets over time.
As always, we welcome any comments you may have.
S & P 500 – The S & P 500 Index includes 500 leading U.S. companies and represents approximately 80% of the available U.S. market capitalization
VIX Volatility Index – The VIX Index is a gauge of equity market volatility
RDM Financial Group is registered with HighTower Securities, LLC, member FINRA and SIPC, and with HighTower Advisors, LLC, a registered investment advisor with the SEC. Securities are offered through HighTower Securities, LLC; advisory services are offered through HighTower Advisors, LLC.
This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors.
All data and information reference herein are from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other information contained in this research is provided as general market commentary, it does not constitute investment advice. The team and HighTower shall not in any way be liable for claims, and make no expressed or implied representations or warranties as to the accuracy or completeness of the data and other information, or for statements or errors contained in or omissions from the obtained data and information referenced herein. The data and information are provided as of the date referenced. Such data and information are subject to change without notice.
This document was created for informational purposes only; the opinions expressed are solely those of the team and do not represent those of HighTower Advisors, LLC, or any of its affiliates.