Authors: Kip Lytel, CFA & Loveth Abu
Montecito Capital Management
Market volatility has a way of grabbing attention. A sharp down day makes headlines, triggers alerts, and can quickly pull investors into reacting rather than thinking. For investors with resilient, multi-asset portfolios, however, volatility is not only something to endure but a condition that can create opportunity when markets overshoot to the downside. But volatility isn’t a sign something is broken – it’s simply how markets work. The longer investors stay invested, the clearer this becomes. Short-term swings matter far less than staying aligned with a long-term plan.
Volatility is the price investors pay for participating in markets that grow over time. Without it, there would be no opportunity to earn returns in excess of inflation. Portfolios that include diversified growth assets alongside lower-volatility or stabilizing allocations can create flexibility to rebalance — shifting capital toward oversold areas where expected returns improve — rather than being forced into reactive decisions. What often creates discomfort is not volatility itself, but how unexpected it feels in the moment – especially when recent market conditions have been relatively calm.
Daily market movement can feel personal, even when it isn’t. Portfolio values change, headlines amplify uncertainty, and short-term losses are felt more acutely than long-term gains. Yet over full market cycles, these short-term fluctuations tend to blend into a much longer upward trajectory.
Consider how often markets experience negative days. On average, the market declines on roughly four out of every ten trading days. And yet, over time, long-term returns have remained positive. This is not because markets avoid volatility, but because growth outweighs short-term noise when investors remain invested.
This is why a sound investment strategy is not built to react to every market move. It is built to endure them. Structure, diversification, and liquidity allow that endurance to be paired with disciplined action when dislocations create opportunity.
Perspective Changes Everything
Headlines often focus on point moves in the market, which can sound dramatic without context. A 400-plus point drop in the Dow today feels alarming, but at current levels that’s roughly a 1% move.
Markets haven’t necessarily become more unstable. The numbers are just bigger. Understanding that difference helps keep emotion from driving decisions. Reacting to point swings rather than valuation shifts often leads investors to reduce exposure just as long-term opportunity is improving.
Financial headlines are designed to capture attention, not provide perspective. Large point swings make for compelling news, but they rarely explain whether those moves are historically meaningful or simply routine market behavior.
As markets grow over time, point movements naturally become larger. A one-percent move today represents far more points than it did decades ago, but the underlying change in value is the same. Periods that feel chaotic in real time have historically included routine pullbacks within longer advances — environments where disciplined rebalancing can incrementally add value.
Fear Has a Measurement—and It’s Usually Overstated
The VIX Index, often called the market’s “fear gauge,” measures expected volatility over the next 30 days. When markets fall, the VIX rises; when markets are calm, it tends to stay low.
A reading below 20 typically reflects investor comfort.
Above 30 suggests rising anxiety.
Above 40 signals extreme fear—a rare event.
Since 2010, the VIX has only reached that extreme on 51 trading days, most of them during the financial crisis of 2008 and 2009. Despite how it may feel in the moment, extreme fear is the exception, not the rule.
The VIX often attracts attention because it rises quickly during market stress and tends to stay elevated for short bursts. Those spikes can feel dramatic, especially when they coincide with sharp market declines. But by design, the VIX reflects short-term expectations, not long-term outcomes.
Historically, periods of extreme fear have been brief. Spikes in the VIX often peak and retreat well before markets fully recover. In many cases, the highest levels of fear occur after a significant portion of market losses have already happened—not before.
This pattern has repeated across market cycles. During major selloffs, volatility tends to surge rapidly, dominate headlines, and then fade as markets stabilize—even if economic uncertainty remains. Investors who react to fear signals after they spike often find themselves making decisions late in the cycle.
Understanding how fear is measured helps separate emotional signals from actionable information. Volatility indicators can provide insight into market sentiment, but they are not timing tools. Investors who treat short-term fear as a permanent condition often underestimate how quickly markets and sentiment can normalize.
Decoding Market Fear: A Closer Look at the VIX
The long-term historical average level of the VIX is approximately 19–20, reinforcing that readings in the teens represent typical market conditions rather than unusually low risk.
The highest volatility readings on record occurred during systemic shocks: intraday levels near 90 during the 2008 financial crisis and closing levels above 80 in March 2020 during the COVID-driven market disruption. These represent extreme outliers rather than normal environments.
Because the VIX reflects a 30-day forward expectation window, it has historically shown strong mean reversion. Spikes in volatility often subside within weeks or a few months as uncertainty begins to resolve and markets adjust to new information.
Elevated VIX environments frequently coincide with broad-based asset repricing, where equities, credit, and other risk assets can become temporarily oversold relative to long-term fundamentals. For diversified portfolios with liquidity and stabilizing allocations, these periods may create opportunities to rebalance toward areas where forward return potential has improved.
While the VIX itself is not directly investable, volatility can be incorporated into portfolio risk management through:
- VIX futures or options used tactically as short-term hedges
- Protective S&P 500 put options or collar strategies
- Liquid alternative strategies such as long/short equity, global macro, or managed futures
- Systematic rebalancing from lower-volatility assets into dislocated markets
These tools involve trade-offs in cost, timing, and effectiveness, and tend to work best when integrated into a broader asset allocation framework rather than used as standalone timing instruments.
Markets Reward Patience—Not Precision
From 1985 through 2024, the S&P 500 delivered an average annual return of just under 12%. But that return didn’t arrive evenly.
Because returns are irregular, success in investing is rarely about getting the timing exactly right. The purpose of portfolio resilience is not constant repositioning, but ensuring investors can stay invested with confidence while making measured, valuation-aware adjustments when opportunity presents itself.
Volatility is not a flaw in the system—it is the price paid for long-term returns.
How Montecito Capital Management Approaches Volatility
At Montecito Capital Management, we don’t view volatility as something to avoid entirely. We view it as something to manage intelligently.
Our investment approach emphasizes diversification across asset classes, strategies, and return drivers. This structure provides both stability and optionality — buffered allocations help manage drawdowns, while liquidity and diversified growth exposures allow capital to be repositioned toward areas of dislocation.
- Multi-asset strategies that balance equities, fixed income, and alternative investments
• Liquid alternatives to provide risk-managed exposure to diverse market environments
• Disciplined diversification and rebalancing across geographies, sectors, and asset classes
• Tactical adjustments to manage risk, capture opportunity, and smooth return volatility
• Long-term growth orientation, ensuring portfolios are positioned to benefit from compounding over time
When markets overshoot to the downside, the goal is not retreat, but disciplined reallocation within a defined risk framework.
The Long View Still Favors Investors
Over the past 88 calendar years, stocks have delivered positive returns roughly three-quarters of the time.
The advantage long-term investors possess is not superior foresight—it is discipline. For investors with diversified, risk-aware portfolios, periods of volatility have often been the environments where future return potential quietly improves beneath the surface.
At Montecito Capital Management, the focus is not on predicting short-term market movements, but on helping clients remain aligned with long-term objectives. The advantage belongs to investors whose portfolios are built not only to endure volatility, but to use it constructively.