Group Lessons: The VIX – What Is It and Why We Pay Attention To It
For me, the CBOE Volatility Index (or “VIX”) is like the Mega Millions jackpot – I only pay attention when the number gets big.
Apparently, the heads of cable news feel the same way. The VIX always seems to make a cameo whenever markets get topsy-turvy…
Source: CNN
The VIX also a key component of CNN’s Fear & Greed Index, which blends seven sentiment indicators to distill investor psychology into a single, easy-to-digest number. As of today – June 4 – the market is tilting more toward Greed than Fear.
Source: Fear and Greed Index, CNN
Within that index, the VIX component currently sits at 17.6, which is considered “Neutral”. So, what exactly does that mean?
Source: Fear and Greed Index, CNN
What is the VIX? The simplest analogy is this: the VIX is the real-time price of wildfire insurance—for your portfolio. No different than insuring your house or car against partial or complete disasters, sophisticated investors can do the same for their stock and bond portfolios using the options market.
If your trusty crystal ball told you in March 2025 that the S&P would tumble nearly 20% in April, you could have bought insurance in the form of “put” options and hedged your portfolio against your market losses.
Here’s the catch: insurance is cheapest before the fire starts. Knowing the future and therefore purchasing insurance right before the blaze, the hedging costs would have been reasonable, as illustrated by the small valley preceding the massive April 2025 spike in the chart above.
Only a week or so later, the cost of that insurance skyrocketed to historical levels as investors feared the complete shutdown of global trade.
Source: Kwanti
As the chart indicates, the VIX – a relative price gauge of portfolio insurance – rarely crosses 50 but peaked at 52.3 on April 8th. People were scared and willing to pay considerable premiums to avoid further pain.
That’s Interesting, But So What?
At Bootpack, we don’t rely on crystal balls.
Instead, we favor a systematic investment approach – allocating capital over time, regardless of market highs or lows. It’s not flashy, but it’s how we avoid emotional decision-making and stay focused on long-term outcomes.
Still, we pay close attention to VIX spikes, because they’ve historically coincided with some of the best long-term buying opportunities.
Below is a chart from April, showing forward S&P 500 returns one to five years after the VIX broke 50 (going back to 1990):
Source: Creative Planning
Yes, the sample size is limited – mostly clustered around the Global Financial Crisis and COVID crash – but the long-term returns are compelling. These moments of panic tend to set the stage for strong rebounds.
It’s one of the clearest data-backed illustrations of Warren Buffett’s timeless advice: “Be fearful when others are greedy and greedy when others are fearful.”
To be clear, this isn’t investment advice to back up the truck every time the VIX spikes. Every investor has different time horizons, risk tolerances, and liquidity needs—and a prolonged market downturn can have meaningful implications for your financial goals.
Importantly, the “being greedy” part of Buffett’s guidance often just means staying the course: tuning out the noise, avoiding panic selling, and remembering that markets are made up of people—and people often overreact. That overreaction has historically been costly to long-term portfolio returns.
What is the VIX telling us today?
For context, here is a rough guide on how to interpret the VIX level:
So, VIX at ~18 suggests a relatively calm but watchful market, not fearful, but not complacent either. Historically, this is slightly below average, as the long-term mean is around 19.5–20.
While the VIX isn’t a crystal ball, it is a useful barometer of market sentiment. Understanding how and when it spikes—and what tends to follow—can help you be opportunistic and/or stay grounded when volatility returns. As always, the key is to align your strategy with your goals, not the headlines.
Disclosure:
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