Market Volatility In Historical Perspective

We have been pampered over the last 4 or 5 years by an amazing lack of volatility in the financial markets. The CBOE option volatility index has lived between 10 and 20 for most of that time period and domestic equity markets have been very strong. Recently we have seen a large spike in volatility, with the VIX index briefly topping 30. You can see the long swings in the VIX index below:

The market seems to go through long periods of volatility as well as long periods of stability. This can be looked at another way below. Bespoke looked at the number of 2% up or down days in the market. You can see that over the last 4 years the number of 2% days has been negligible.

A little bit of volatility is thus not in and of itself a cause for concern. But, it does test the psychological makeup of investors. It is in times of volatility that most investors make their biggest mistakes.