The volatility of the Australian share market, as tracked by the S&P/ASX 200 VIX (INDEXASX: XVI), can provide some valuable insights into the best points in time to buy ASX 200 shares. The coronavirus pandemic is a perfect example of this.
Since the S&P/ASX 200 Index (ASX: XJO) reached its peak of 7,162 on 20 February, it has been on a wild ride. The ASX 200 index bottomed out at 4,546 on 23 March and has made relatively steady progress back to 6,047 at the time of writing. That represents a 36% decline, followed by a 33% rise. Despite the strong rally, the index is still down nearly 16% from its February high.
Warren Buffett’s approach to investing
Famous investor Warren Buffett has 2 key rules for investing:
- Never lose money.
- Never forget rule 1.
So, how do you avoid losing your hard earned money? And, how do you know when the best time is to buy ASX 200 shares for the long term?
One way to inform your broad investment decisions is by following the S&P/ASX 200 VIX.
What is the VIX?
In simple terms, the VIX is a measure of implied volatility in the ASX 200 (being the benchmark index). A low figure for the VIX represents a period of expected low volatility, whereas a high reading indicates an increasing amount of implied volatility, and presumably plenty of uncertainty for investors.
VIX is a helpful tool that can assist long-term investors to follow another of Warren Buffet’s favourite strategies, “Be fearful when others are greedy and greedy when others are fearful.”
When to buy ASX 200 shares during the pandemic
The VIX began 2020 around $12 and moved within the range of $11–$16 up until 24 February. It subsequently sky-rocketed over 230% to roughly $53 on 18 March. An extremely high VIX is a positive indicator for long-term bullish investors to buy ASX 200 shares.
Every bear market is ultimately followed by a bull market. The ASX 200 VIX wasn’t around during the Great Recession. If we study the S&P 500 VIX, however, we can see that it was also extremely high just months prior to the bottom of that bear market. This was one of the best times in history to buy shares!
The VIX is currently trading at $18.78 at the time of writing. This indicates that although some of the best opportunities may no longer be available, the market should provide more buying opportunities than in January and February.
Foolish bottom line
Over the long term, high quality ASX 200 shares should continue to be life-changing assets to own. Stock market crash or not, short-term volatility or not, continuing to invest in the right businesses is likely to stand you in good stead. However, watching the VIX can help you to identify timely buying opportunities and assist with capital allocation decisions.
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Motley Fool contributor Lloyd Prout has no position in any of the stocks mentioned and expresses his own opinions. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.