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Should you buy or sell the spike in fear?

The Dow dropped 1300 points in a couple of days and the CNBC fear machine cranked into high gear. Even Fox Business News got into the action with the headline grabber "Biggest market crash in our lifetime coming - economist Harry Dent." Of course if you google "Harry Dent crash," he makes the same call every year so it is meaningless. The real question is: should you buy or sell the fear? The answer: it depends.

Buy the fear

Warren Buffett's famous quote is "Be fearful when others are greedy and be greedy when others are fearful."

Buying spikes in the fear index, aka the VIX, has lead to above average returns in subsequent months. CSFB's Jonathan Golub ran the numbers from 2010 to today and it shows the great performance if you buy VIX above 20 or 25. Note that yesterday, the VIX hit 26.88 and today is still above 22.

vix performance

Sell the fear

Of course this works well in a bull market like Golub shows. However, you don't always want to buy fear especially if you are entering a new bear market. For example if you bought the VIX above 20 in 2008, you would have been in for a world of pain. The VIX went above 30 several times and then to 80 in the fall.

snp vix 2008

Buy or sell today?

We lean toward the side of buying this dip because the economy is still strong and corporate earnings are growing above 20%. Keep in mind that the market is unlikely to recover in a straight line up so you can be patient in buying the dips over the next few weeks.

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About the Author: Chris Wang

Chris Wang


Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Runnymede Capital Management, Inc.-"Runnymede"), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Runnymede.  Please remember that if you are a Runnymede client, it remains your responsibility to advise Runnymede, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Runnymede is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Runnymede's current written disclosure Brochure discussing our advisory services and fees is available for review upon request. Please Note: Runnymede does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Runnymede's web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.

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