The fear index seems to be signaling that all is well.
The Chicago Board Options Exchange volatility index (“VIX”) represents the short-term (30 days) implied volatility of a S&P 500 option. The VIX—also known as the fear index—has returned to pre-financial crisis levels.
The last time the VIX was at this level was last April—right before the index surged as a result of the flash crash and sovereign debt rumblings. Before that, comparably low levels date back to pre-financial crisis 2007.
The lowest VIX levels in the past 20 years were January 1994 and January 2007. In both instances, the VIX rose roughly 50 percent in less than a month.
Why the idle speculation on the direction of the VIX?
Any retiree, near retiree, or remotely near retiree should have some basic awareness of how capital market volatility can affect their portfolio and, subsequently, their retirement income.
Capital market volatility and retirement finances do not mix well. In general, higher volatility puts the best laid retirement spending plans at risk. Financing a stable income stream (retirement spending) with a risky asset is less than optimal. The riskier the asset, the worse this situation becomes.
And as discussed in several previous posts, volatility is the key ingredient in sequence of returns risk which can be devastating for retirees—just ask anyone who has contemplated retirement during the past several years.
Anyone involved in retirement planning would be wise to understand the implications of volatility and to “be fearful when others are greedy and greedy when others are fearful.”
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