The S&P/ASX 200 VIX (ASX: XVI) is the volatility index for the S&P/ASX 200 Index (ASX: XJO). The VIX is calculated using the spread between call and put options and acts as a barometer for market sentiment.
The VIX is commonly regarded as a proxy for market risk and is colloquially referred to as the "investor fear gauge" given its inverse correlation to market returns. In times of uncertainty, the VIX spikes higher to foreshadow a large downward movement to the Index. Conversely, when things go smoothly, the VIX trends lower as investor fear subsides and markets trade higher.
Current VIX
In the months leading up to the U.S. Presidential election, the VIX spiked over 50% higher to trade at (then) six-month highs. However, in the aftermath of Donald Trump's victory, the VIX has drifted lower to trade below the long-term average as global markets take the President-elect's victory in their stride.
In my mind, the low VIX is problematic for investors.
Investor psychology
When volatility is low, a common pitfall for investors is the desire to continuously buy or sell stocks. A lack of action when markets are moving higher can cause anxiety to those who fear they're missing out on market opportunities.
For example, pundits may buy bank stocks like Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA) and National Australia Bank Ltd (ASX: NAB) at current prices, for no other reason than the fact they've gone up 21%, 22% and 25% respectively in the last two months.
Even the most disciplined investors can fall into this trap of using past data to buy stocks they shouldn't pay certain prices for, simply because the market is going up.
Alternatively, the long-rally may entice investors to sell stocks they should be holding, like BHP Billiton Limited (ASX: BHP) or South32 Ltd (ASX: S32), only because they're expecting a fall after strong price gains. This is bad investing.
Finding value
The key principle of sound investing is finding value in stocks, irrespective of what the rest of the market is doing. When prices are high, long-term investors must be able to step back and realise that it's okay if they don't do anything.
Equally, if and when markets fall, investors must be mentally prepared (and brave enough) to buy fundamentally stable stocks going on the cheap.
For example, if investors purchased ANZ, CBA and NAB post-election, when the VIX was high, they'd be sitting on those pretty 20+ percentage gains today!
Foolish takeaway
Successful long-term investing is about buying solid stocks at the right price. Although it is futile to attempt to pick the low-point of a stock, if companies are bought at the right price, long-term investors should reap rewards in the long-run.
Keeping this in mind, I believe most blue-chip stocks like ANZ, CBA, NAB, Westpac Banking Corp (ASX: WBC) and Rio Tinto Limited (ASX: RIO) are fully-valued at current time.
Accordingly, I recommend investors hold off buying such stocks out of mere fear of inaction. Being patient is key.
