Selling stocks to buy more conservative investments could lead to missing out on some market upside. It’s also possible that the VIX picks up the highest level of fear after losses have already happened and some losses are still experienced.
It is for this reason that I only use the VIX as a supporting tool in periods of time when I am already looking to decrease my stock holdings. If my stocks have performed particularly well for a long stretch, I find myself with more stock exposure than I feel comfortable with. I then refer to the VIX to help me find the right time to rebalance out of stocks. If I’m not perfect with the timing, I still feel comfortable because it was an action I’d decided to take anyway.
When I’m in search of investment opportunities
When the VIX measures high levels of fear, it trades high. Investors who are fearful and panicking may overreact, driving stock prices down — and equities that were trading at expensive prices relative to their values become more affordable. I am very optimistic about the long-term prospects of the stock market, so this is the perfect time for me to swoop in and buy.
When the markets started to dive because of the COVID-19 pandemic in March, I believed that this was a perfect opportunity to buy stocks. For the most part, stocks had been upward bound since their recovery in 2009 and were trading at all-time highs. This pullback didn’t last long, but it was significant enough to allow me to buy SPDR S&P 500 (NYSEMKT: SPY) at a lower price.