How to measure and control fear in your portfolio
Happy Halloween! If you’re still looking for costume ideas, we’ve got you covered: a FAANG vampire. If you own Facebook, Apple, Amazon, Netflix, Google, and a cloak— you may be onto something.
We’re also discussing handling fear as an investor and the finances behind Halloween.
- The economics of the second biggest retail holiday
- How inflation has impacted the candy market
- A company that’s only open for two months a year
The fear index
The best part about haunted houses may be that they’re seasonal and eventually go away. From a market perspective, much of 2022 has looked like a haunted house—no one is quite sure what’s around the corner. While the long-term feels more plentiful, like Thanksgiving, the short-term reminds us to manage our fear and control our emotions.
October can be spooky, both culturally and economically. Historically, it’s been a bad month for stocks—the “October Scare” is a market myth that originated from events like the Black Monday’s of 1929 and 1987.
While calendars and history can’t predict market events, there is an index that measures future volatility in the market. It’s called the fear index, or “VIX”.
The fear index was created by the Chicago Board Options Exchange as a real-time market index representing the market’s expectations for the relative strength of near-term price changes of the S&P 500 index.
In other words, it measures future volatility based on option prices.
Investors purchase options when they expect a stock price to make a significant move. So, when investors expect large price drops, there is likely a surge in demand for put options creating a correlation between S&P 500 options prices and investor fear.
When S&P 500 put options spike, so does the VIX. A VIX range of 13-19 is considered normal while 20 or higher can expect volatility over the next 30 days.
In March of 2020, as fears of COVID-19 spiked, the VIX was in the 60s. For most of 2022, the VIX has averaged in the 20s.
The October Scare and the fear index are both examples of volatility in the market – which can be scary. However, long-term investors know Halloween doesn’t last forever.
If VIX is a general fear index, what’s yours? Think about moments in the market that triggered extra emotions or fear and use November to consider if you need to make any adjustments.
“Actual circumstances don’t make much difference in all of these cases. What generates all the emotion is just how big the gap is between expectations and reality.” – Morgan Housel
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This week. take a moment to check out:
- Costs: The scariest part of Halloween this year? Inflation. See how it’s affecting everything from candy to costumes.
- Economy: Halloween is the second-biggest retail holiday in the United States. See how it impacts the economy.
- Business: This company makes $600 million a year and is only open for two months.
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