RISING IMPLIED VOLATILITY = INCREASING RISK
Relative risk as measured by the implied volatility of the S&P 500 is show since 2007 in the chart above. The large spike in 2008 resulted as the market was in a “crash” due to the debt crisis. Note that leading up to that period in 2007 the VIX was rising as shown by the regression line. Comparing this to the 2015 rise in the VIX we can see there is increased risk, but not as significant as that leading up to the 2008 crash.
What should be done? Take some precautions with stock market exposure by reduction weak performers. However, it is no time to panic. Many of us remember the gut wrenching fall of stocks in 2008, and this recent memory affects our perceptions of the current market to an exaggerated degree.
John Boyd, CFP