Just like that, volatility is back!

Or maybe it’s gone again.

Or maybe it’s not.

Regardless, the volatility index (VIX)—often considered a measure of investor fear—reached 65 this week.

The VIX has only been at this level three times in its history:

Black Monday (October 1987), the Global Financial Crisis (08/09), and the "COVID crash" (2020).

Keep in mind that the VIX recently spiked to this extreme level, with the market only down 8% from its all-time high.

Not to mention, U.S. stocks are still UP ~10% this year, so it's clear that one of these events is not like the others.

In today's email:

• Why volatility is normal
• Risk disguised as prudence
• Investment opportunities

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Volatility Is Normal

Until a couple of weeks ago, it had been more than 18 months (350 trading days) without a single-day decline of 2% or more.

This lack of volatility lulled many investors into complacency, which quickly turned to panic when the tide abruptly shifted.

Those 18 months were an obvious anomaly, given that we typically experience about three pullbacks of 5% or more every single year.

Morgan Housel described the current decline this way:

While maybe tongue-in-cheek, there's a lot of wisdom there.

We convince ourselves that today's decline must be important despite the fact that no previous decline is even remotely relevant today (if we remember them at all).

That said, the average intra-year decline is about 14%, so things could get worse before they get better.

If they do, that's okay because history teaches us that the only way a market decline can hurt us is if we make poor investing choices during it.

Be Careful of Risk Disguised as Prudence

In my opinion, the most dangerous form of investment risk is a decision cleverly disguised as prudence.

The most common example of this risk is the decision to "temporarily sell and wait for calmer markets."

As attractive as that may sound, what if the market shifts tomorrow, and you're left sitting out of the market?

If that happens, there's a very real possibility that you have permanently impaired your financial future.

As uncomfortable as staying the course sometimes is, it protects you from the very real risk of missing out on any long-term return the market has to offer.

As we often say, if you never sell, you never have to regret having sold.

But this is what makes successful investing so difficult.

What often feels prudent in the short term (selling out of a declining market) is often foolish in the long run.

Conversely, what feels foolish in the short term (staying the course) is often smart in the long run.

Volatility Is Opportunity

If there is one thing that all great investors seem to agree on, it's this:

They view periods of market volatility as an opportunity, not something to fear.

While countless great investors have shared similar thoughts, Warren Buffett explained it simply:

While Main Street investors tend to rush toward the exits at the first sign of volatility, great investors use these periods to buy attractive long-term assets at lower prices.

Buying at lower prices can be done with excess cash or through Portfolio Rebalancing (selling what has gone up and buying what has gone down).

This may be obvious, but I think we'd be wise to embrace the wisdom of the world's greatest investors rather than acting on the opinions of TV pundits or our friends around the water cooler.

Stay wealthy,

Taylor Schulte, CFP®