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Volatility plunges! Read this before buying any more shares!

Analysts and strategists are worried! Sharemarket volatility in the U.S. and Australia is at multi-year lows, indicating that investors and speculators alike are becoming too complacent.

Is This Important?

Market commentators are noting that if investors are becoming complacent about the direction of global markets (i.e. happy that there are few disruptions to cause the next crash), then they will be unprepared and panic should a problem arise.

What is a Volatility Index?

The ASX uses the index as a measure of confidence in the market. Lower volatility equals more confidence and this is demonstrated by the peak in volatility during the low-confidence times of the GFC.

What’s the Reading Now?

The US S&P 500 Volatility Index (VIX) recently hit a low of 10.28, from a peak of nearly 80 during the GFC, and an average of a little over 20 leading into the GFC. The ASX 200 VIX index recently hit an all-time low of just 9.33, however this record has only been in operation since February 2013.

What Should We Do?

Well, Foolish investors purchase quality companies, with great management teams, that have sustainable competitive advantages to provide superior returns over the long term. As a result, the VIX index really doesn’t have much influence on our investing.

Investors should however, keep an eye on it as a measure of when the market or individual companies may be on sale. High volatility indicates (usually) wildly oscillating or falling markets and could present a buying opportunity for savvy investors.

What Should We Buy?

The next time the market’s looking cheap invest in one of the stocks in the report below, or in other companies with a great growth outlook – perhaps CSL Limited (ASX: CSL), or one of my favourites, Crown Resorts Ltd (ASX: CWN).

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Motley Fool contributor Andrew Mudie does not own shares in any companies mentioned. You can find Andrew on Twitter @andrewmudie

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