When Fear Is Highest, Returns Are Often Highest

Investors often look to market fear as a signal—assuming that rising anxiety means trouble ahead and that falling anxiety means safety. The VIX index, commonly called the market’s “fear gauge,” is frequently used for this purpose.

But history suggests a different and far more counterintuitive lesson: the size of market returns is strongly correlated with the level of fear, and some of the strongest positive returns have occurred when fear was at its highest.

What the VIX actually captures

The VIX reflects how volatile investors expect the stock market to be over the next month, based on option prices. When uncertainty rises—during sell-offs, recessions, or crises—investors pay more for protection, and the VIX rises sharply.

In short:

• High VIX = high fear and uncertainty

• Low VIX = calm, complacent markets

Importantly, the VIX does not forecast market direction. It measures emotional intensity, not future returns.

Fear and return magnitude move together

Periods of elevated VIX are associated with larger subsequent market moves—both up and down. However, once fear has spiked, forward returns have historically been skewed to the upside.

Why?

• Prices often fall faster than fundamentals deteriorate.

• Risk premiums expand during fear-driven sell-offs.

• When uncertainty begins to resolve, even modestly, prices can rebound sharply.

This creates a consistent pattern: high fear → high expected return, even though the experience feels uncomfortable in real time.

The visual message

• As the VIX rises, the range and size of outcomes expand.

• Importantly, large positive returns (blue dots) are plentiful at high VIX levels, not just negative ones.

• Fear increases uncertainty, not one-sided downside.

• This visually undermines the idea that “high fear = get out.”

The mistake investors repeatedly make

Many investors treat fear as a warning sign to exit the market. Unfortunately, this often results in:

• Selling after prices have already fallen

• Missing the strongest rebound days

• Locking in losses rather than allowing recovery

Market history shows that the worst emotional moments are often followed by the best return environments. Using fear as an exit signal means systematically stepping aside when long-term opportunity is greatest.

Why “waiting for calm” doesn’t work

Low-VIX environments feel safe—but they often coincide with:

• Higher valuations

• Lower expected returns

• Greater vulnerability to future shocks

By the time fear subsides and the VIX returns to comfortable levels, markets have often already recovered. Investors who waited for reassurance typically re-enter at higher prices.

A better principle: stay invested regardless of fear

Rather than using the VIX as a timing tool, it is more useful as a behavioral indicator:

• Rising fear explains why markets feel painful—not what to do about it.

• Elevated VIX levels are a reminder that uncertainty is already priced in.

• Long-term investors are compensated for bearing discomfort, not avoiding it.

  
  

The evidence supports a simple rule:

Investors should not use market fear as a signal to exit the market.They should remain invested regardless of the level of the VIX.

Bottom line

• High VIX reflects fear, not future losses.

• The magnitude of returns tends to increase when fear is elevated.

• Exiting the market during fearful periods has historically been costly.

• Staying invested—especially when it feels hardest—has been rewarded over time.

Fear is part of the price investors pay for long-term returns. Avoiding it usually means giving those returns up.

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Dr. Andy Lawson is the principal of Freshfield Investments, a Registered Investment Advisory firm in Plano, Texas serving clients locally and nationwide. Freshfield provides investment management and financial planning as a fee-only, fiduciary. To book a virtual or in-person complimentary consultation, please visit our Contact page.

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Data source: Kenneth R. French Data Library, Tuck School of Business, Dartmouth College

My thanks to David Welch, Citibank and Alexandra Neff, Bank of Texas