How retirees can survive a bear market

Wait until the VIX drops much lower before putting money back into the stock market.

This is the conclusion of a 2019 academic study in the Journal of Financial Economics. Titled “Volatility-Managed Portfolios,” it was conducted by economics professors Alan Moreira of the University of Rochester and Tyler Muir of UCLA.

The findings of this study are surprising because they contradict what investors have been taught for years about how we should react to volatility. We’ve been told that our emotions are our worst enemies when it comes to making portfolio decisions. This in turn means that even though our gut tells us to run for cover when stock market volatility spikes, we should maintain or even increase our exposure to stocks.

Turns out our guts were right. The stock market has historically outperformed when the CBOE VIX Volatility Index,
it was low, not high. This is shown in the accompanying chart, which plots the S&P 500’s SPX,
monthly average total return as a function of monthly average VIX. Notice that the highest average return was produced in the 25% of months with the lowest VIX levels, and that this average steadily declines as VIX levels rise.

I wrote about this strategy two years ago for Retirement Weekly. I am reviewing it now because its performance in this year’s bear market is a good illustration of its merits. While it called for it to be almost fully invested at the end of last year, it quickly cut its recommended equity exposure as market volatility spiked earlier this year. So far this year, its average equity exposure has been more than 30 percent lower than the market.

Using the VIX as a market timing tool

Moreira and Muir do not recommend using the VIX as an all-or-nothing signal to trigger the switch from 100% market to 100% cash. Instead, they suggest using it to gradually increase or decrease your exposure to stocks. In various emails over the past couple of years, I’ve been given a few simple rules for how this might work in practice:

  1. Choose a target or default equity allocation. For example, if you are otherwise fully invested in stocks, the target or default capital allocation will be 100%.

  2. Determine a middle-of-the-road VIX level that will correspond to your target allocation. This base level is what you will use to determine your equity exposure. If the VIX is higher than your key level, your equity exposure will be below the default level — and vice versa.

  3. To determine the exact level of equity exposure for each month, multiply the target allocation by the ratio of the VIX baseline to the immediately preceding month’s closing VIX level.

For example, suppose the target equity allocation is 100% and the midpoint VIX level corresponding to that target is the historical median — which is currently 17.71. Since the VIX at the end of July was 21.33, your equity allocation in August would be 83.0%. And assuming the VIX closes August where it was as this column starts to press, your allocation for September will be slightly lower at 81.3%.

While this approach typically doesn’t require huge exposure changes from month to month, it does lead to large swings in equity exposure over time. In the case of my hypothetical example, the level of equity exposure since 1990 ranged from a low of 28.3% to a high of 174.9% (in other words on margin).

I tried this approach again in 1990, which is how far back data is available for the VIX. I credited the 90-day trailing rate to the unmetered portion of my hypothetical portfolios, while charging the margin rate cost when the model called for more than 100% investment.


Annual performance since 1990

Standard deviation of monthly returns

Sharp analogy

Market Timing Model Based on Volatility




S&P 500 Total Return




You might be wondering what’s so impressive about a strategy that didn’t make more money than the S&P 500. The answer lies in the strategy’s lower risk—14% lower, as measured by the standard deviation of monthly returns. As a result, the strategy’s Sharpe ratio (a measure of risk-adjusted return) is significantly higher than that of the S&P 500.

Essentially equating market return with lower risk is a big deal because that lower risk increases the likelihood that investors will actually stick to their financial plan. The significant volatility of the S&P 500 in bear markets is one of the big reasons investors abandon their plans during bear markets—almost always to their detriment over the long term.

The table doesn’t show how the strategy has fared so far this year. But it has lost significantly less than the market, losing 7.8% through August 25, when this column goes to press. Although a loss is never welcome, it is much smaller and more tolerable than the losses experienced by the overall market.

As the Wall Street saying goes, the winner in a bear market is the one who loses the least.

Learn how to get your financial routine in order at the Best New Ideas in Money Festival on September 21st and 22nd in New York. Join Carrie Schwab, president of the Charles Schwab Foundation.

Mark Hulbert is a regular MarketWatch contributor. Its Hulbert Ratings tracks investment prospectuses that pay a flat fee to be reviewed. He can be reached at

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