Monday’s 777-point drop in the Dow Jones industrial average seems to have shaken up people for whom the ongoing credit crisis was merely background noise.
Working people worry about the money they’ve diverted into 401(k) plans or IRAs over the years. Those on fixed incomes fret about the decline in the value of their assets.
Well, I have news for you: the professionals are concerned too.
“We’re really afraid,” said Chip Addis, president of Addis & Hill, a Wayne financial planning firm. “This is unprecedented. None of us has been through this before. This is striking at the heart and soul of our financial system.”
But being afraid isn’t the same as panicking, and Addis said that most clients are “just rolling” with the daily swings in the markets.
As nerve-wracking as triple-digit movements in the Dow Jones industrial average are, we’d better be getting used to them.
Addis, whose firm is a fee-only financial planning firm, said the market hates uncertainty. He doesn’t see that diminishing over the next six months.
It bears repeating that by selling everything now, you will be selling low, having bought high. That’s the opposite of what we’ve been counseled to do.
And for those tempted to pick up a “bargain” at these beaten prices, recognize the danger of investing as the market soars and swoons daily. Anyone who bought Wachovia at what appeared to be a bottom at $9.08 a share on July 15 saw the stock close at $1.84 Monday. Keep those kinds of bargains away from me.
As the United States mops ups from the popping of the housing bubble, it’s time to make sure your financial plan is appropriate for you. If it is, you’ll be in the position to benefit when the markets stabilize and recover.
For now, it’s shared misery time. At least we can commiserate with one another about what the markets have done to our retirement plans.
One measure of investor fear is the Chicago Board Options Exchange’s Volatility Index, called the VIX.
To understand what it means, it helps to know first what the Standard & Poor’s 500 index is. The S&P 500 is composed of the 500 biggest U.S. stocks based on market capitalization. By tracking the S&P 500 index over time, you can see the rise and fall in the U.S. stock market.
Rather than buying all 500 stocks, you can buy a mutual fund or an exchange traded fund that mimics the movement of the S&P 500, thereby “owning” the market.
But the pros go a step further using index options as a hedge against the investments they’ve made in stocks. They might buy ‘put’ options when they’re betting the market will fall during a particular month.
So we come to the VIX, which tracks real-time prices of S&P 500 index options. The Chicago Board says the movement of the VIX reflects investors’ consensus view of future stock market volatility.
When there is fear, the stock market tends to fall but the VIX shoots up. The VIX marched steadily higher throughout the month of September. But on Monday as the markets tanked, the VIX hit the highest level in its 18-year history - 46.72.
Bloomberg News reports that the VIX has only surpassed 40 points during four other high-anxiety events: the bankruptcy of WorldCom in 2002, the terror attacks in 2001, the collapse of the Long-Term Capital Management hedge fund in 1998 and the Asian financial crisis in 1997.
Thanks to Tuesday's 5 percent rally in the S&P 500, the VIX dipped below 40. But at 39.25, the VIX is clearly indicating the nervousness of investors waiting for Washington to try again on a financial-sector rescue plan.