Fear Factor: Relying on a scientific investing instrument

The common perception out there is that our investment dollars are floating on top of an ever more turbulent sea.

This sense was been reinforced by the onslaught of 2008-09 and then, more recently, the little episode we had in Europe a few months ago. Still, the way most Canadians view market turbulence or volatility is a subjective one and this is why it’s difficult for some to get a handle on what risk is.

Whereas economists and portfolio managers think in terms of risk=volatility=standard deviation, may relate volatility to how much one’s statement value bounces around month to month.

Indeed, I have found that this is a great way to hone in on the discussion of risk, but sometimes it’s useful to be able to refer to something more (gulp) scientific. And the most reported on instrument out there has been the Chicago Board Options Exchange Volatility Index, or VIX.

A Volatile Leading Indicator

The VIX, which has been around since January 1990, is essentially an indicator of future volatility in the S&P500 basket of stocks - specifically, the weighted average of the implied volatilities embedded in stock options. (more)