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Money

What the Fear Index Can Teach Us About Living a Rich Life

Feb 16, 2018    Andrew

Feb 16, 2018    Andrew

On this blog, I write about building a better life, and money happens to be a heavily recurring topic. That’s because money can buy time, which equates to freedom. What better way to live a better life than to control your time and therefore have more freedom? 

Time freedom is a powerful component of a life that is more aligned with our personal values. With time freedom, we can explore the things we enjoy, and solve problems we want to solve. We are no longer bound to work that isn’t a good fit because we are reliant on that next paycheck to survive.

But money itself isn’t a catch-all for a better life. It’s a tool we have in our toolbox, but it’s up to us to use it in the best way possible. Money alone does not solve life’s problems. Life is messy, and there’s not a damn thing anyone can do about it. 

You can’t just throw money at life’s biggest messes and think everything will always turn out well. More often than not, it won’t. In fact, such a misguided outlook towards money can easily be responsible for creating life’s biggest messes in and of itself.

What’s the fear index (AKA the VIX)?

And that’s what brings us to today’s topic: the VIX, otherwise known as the Fear Index.

What’s the VIX, you ask? Essentially, it’s an index that tracks the predicted volatility of the stock market in the near term (the next 30 days). It gauges investor confidence in the market, which is a way of predicting overall market risk. 

Some recent events have brought the VIX into the spotlight of the mainstream media. The story is not only interesting, but packed with valuable life lessons.

Greed and the ignorance of downside risk

For the 15 months spanning November 2016 and January 2018, the stock market was remarkably non-volatile. In that time span, there was only a single month wherein the S&P 500 had a negative return (that was March of 2017). Even then, the negative return was only -0.04% (that’s 4 percent of a percent). Barely even noticeable on a chart! 

I intentionally ignore the Dow Jones Industrial Average in any context that discusses the stock market or the economy. The Dow is discussed quite heavily within the major media outlets, but it’s a poor indicator of the overall health of the stock market. Here’s why.

All told, the S&P 500 returned a whopping 28.8% in this 15 month span. That’s quite a trend line. While the stock market consistently marches upwards over the long term, it’s usually a bumpy ride marked with some level of volatility in the short term. Kind of like driving your car up a mountain, on a road littered with dangerously large potholes. You’re going up, but it’s not an enjoyable ride.

Whenever there’s an unusual trend (such as this sustained lack of market volatility), people will start devising ways to profit from it. This is why people “invest” in cryptocurrencies. It’s why, leading up to the financial crisis, banks rushed to buy mortgage-backed securities that were nothing more than a giant house of cards waiting to collapse. 

Betting on the fear index

And now, people have taken to betting against volatility in the stock market. That’s right: betting against the one thing that inherently defines the stock market. There’s a massive upside for a reason, and that reason is the massive downside risk involved. 

Bet right, win big. Bet wrong, lose everything. It always seems to be a worthwhile risk in the name of cashing in. Downside risk is a buzzkill when you feel invincible, so it goes unchecked. Why do you think Las Vegas is so successful?

When the VIX is low, it reflects lower predicted volatility. When it’s high, it reflects higher predicted volatility. Investor fear equates to massive share sell-offs, which drives volatility up — thus leading to a higher VIX score. This is why the VIX is often referred to as “the fear index”. 

With the marked lack of volatility in the stock market over the last 15 months, investors took to betting that market volatility would remain low. All was well until the beginning of February. That’s when turbulence returned to the stock market, at a level that hadn’t been seen since the recession. 

All of a sudden, bets against volatility started to implode in rapid fashion. One man’s story, in particular, drives home the impacts that were felt.

What can be learned from this?

A rich life is built slowly

There’s no such thing as a low-stakes method for getting rich quickly. But for the sake of argument, let’s pretend that there is. Would it be a worthwhile pursuit? I don’t think so.

There are real-life examples of fame and/or fortune that have directly contributed to the demise of its inheritor. There are stories of professional athletes who made millions and are now in turmoil. Lottery winners are generally known to be much worse off for the hundreds of millions they inherit. 

And that’s because a rich life isn’t directly correlated with monetary wealth. Failure to acknowledge this is the plight of many a person’s ability to lead a happy life. 

A rich life is built on a deep understanding and care for yourself, along with a deep understanding and care for your loved ones. It is built on self-exploration. It is built on fulfillment from accomplishing things that matter to you. 

And these things don’t happen overnight. In fact, the pursuit of these things never really has an endpoint. It’s a perpetual journey. The day I stop trying to be better is a day I don’t want to be alive to see.

A rich life is built brick by brick, slowly over time. The process of constructing a rich life is, in itself, immensely satisfying.

The best thing about building your life in this fashion is that so much day-to-day noise can be safely ignored, leaving mental bandwidth to be dedicated to the things that really matter to you.

Sometimes it’s good to be boring

You know what’s so great about the Fear Index? It can be ignored by those of us who build our life on sound financial planning principles. 

This is admittedly boring. It doesn’t provide a rush of adrenaline to passively invest in index funds that match market performance. But planning a stable future shouldn’t be about excitement and thrill-seeking. There are plenty of other ways in life to get a rush of adrenaline outside of an investing strategy.

I know that I can’t consistently beat the market, and I’m not foolish enough to try. I avoid any investment product or asset that claims it will suddenly make me rich. Because that’s not investing, it’s gambling.

If I believed that gambling was a path to wealth and a happy life, I’d have much more fun high-tailing it to Vegas than I would buying digital coins on the internet. 

I’d rather HODL actual assets, without risking my financial stability.

Other thoughts

Humans are happy when solving problems, not when trying to make them disappear. Attempts to get rich quick amount to nothing more than wasted time trying to gloss over life’s problems. And in the process, bigger problems are often created. 

The desire to earn more money, at it’s core, is tied to this human need to solve problems for fulfillment. In that sense, it works in reverse. Money doesn’t buy happiness. Conversely, happiness leads to more money.

With a boringly safe investing strategy, more resources are available to work on yourself — to build a rich life slowly over time. 

You don’t have to waste time studying the latest trends in cryptocurrency, or waste money paying someone else to do it for you. You don’t have to buy lottery tickets, or worry about what might happen if your one-sided bets hit the fan. 

Instead, these resources can be spent on solving the problems you want to solve. And the money will follow.

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