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Regions Private Wealth Management: Is Volatility Back?

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After a year in which the S&P 500 basically went straight up with not even the slightest hint of a major correction, 2014 has already proved to be a much bumpier ride with the broader market already backing off 6%+ and rallying back to all-time highs.

Listen as MoneyLife’s host, Chuck Jaffe, interviews David Tannehill, director of Investment Research Group at Regions, about equity market volatility or read more below.

Coming into this year, we were a bit concerned that there was a lack of healthy skepticism, or “fear” in the markets for the lack of a better term. A reflection of that lack of fear can be signaled by the Chicago Board Options Exchange (CBOE) Volatility Index, or VIX.

A VIX reading of 12-15 has typically exemplified a market in which fear is low and few investors are purchasing downside protection on equity positions via the options market. As a frame of reference, during the Financial Crisis of 2008-2009, a time of heightened nervousness on the part of investors, the average close for the VIX was 32.09. This is a far cry from the 2013 average reading of 14.23 and the 2014 average reading of 14.85 through 2/27/2014.

So why even pay attention to the VIX? It does serve a purpose as a fear gauge. Furthermore, the markets may be in the early innings of a paradigm shift of sorts where higher VIX readings relative to recent history become more commonplace. Within the context of an improving U.S. economic backdrop, higher VIX readings and equity market volatility (i.e. greater fear) should be viewed as opportunities for long-term investors.

We would point to Warren Buffet, the most famous long-term investor of them all, who once said, “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.” Good advice in our opinion.

Tips
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  • Save Time - Call it the "two-minute rule": when an item at work or at home comes up that takes two minutes or less to complete, do it immediately. It's one less thing to add to your list.
  • Save Money - Track every expense to save money (spreadsheet, online banking tools, budget software, etc.). By knowing where all your money goes, you can begin to prioritize where you can save.
  • Save for the Future - Make a serious effort to define your goals today. How much will college cost? When are you buying a house and what is your realistic budget? When do you want to retire? How much will you need in retirement?
  • Save Time - Two words for you: meal planning. If your family eats dinner at home seven nights a week, it's easier to plan and shop for those meals all at once. It saves time and money, too, as you are more inclined to stick to your list at the grocery store rather than splurging on impulse items.
  • Save Money - A radical idea: if you think of saving as priority, a central goal in itself, every time you rent a movie, eat at a restaurant, buy a coffee or luxury item, you are delaying your goal. Alternately, if it helps make you save money, when you do spend money on luxury items, transfer an equal amount into your savings at the same time.
  • Save for the Future - Spend less than you earn. Crazy idea, right? How do you achieve this? Start with a budget. Knowing your income vs. your expenses will help you reduce the need to borrow (credit cards, loans) and allow you to save for the future.
This information is general in nature, is provided for educational purposes only, and should not be relied on or interpreted as accounting, financial planning, investment, legal or tax advice. Regions neither endorses nor guarantees this information, and encourages you to consult a professional for advice applicable to your specific situation.

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