Two ways to play volatility

The market may be on the verge of a relapse. And this time, even those with a diverse range of investments could lose out. So, to survive the next dip, it's worth considering all options. Enter the VIX volatility index.

Is the market on the verge of relapse? One man who's been a step ahead since the credit crunch began thinks so Morgan Stanley strategist Teun Draaisma. Having warned his clients of the downturn in 2007, at the end of 2008 he turned bullish, calling for a "full house buy". Now he sees another turn looming. "We think the market peak is near, and expect 2010 to show a volatile whipsaw pattern in equities When the next earnings recession hits, perhaps in 2012, we expect equities to complete the bear market that started in 2000."

Worse, investors could be facing another bout of "death by correlation". Two years ago, even investors with classically diversified portfolios lost an average of 33.3%. Diversification failed us all. So, to survive the next dip, it's worth considering all options. Enter the VIX. While the rest of the market (bar bonds) slumped, it quietly returned 72.6%.

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Theo Casey

Theo is a former financial writer and editor, having written for reputable titles such as Euromoney Institutional Investor and Redwood Publishing. He has also appeared on-screen with Al Jazeera, BBC and CNBC and on MoneyWeek Theo covered funds, share tips and stockmarkets. He also edited the country's oldest newsletter with Lord Rees-Mogg for four years. Theo now runs his own content marketing agency for financial companies, and he is a seasoned CISI-qualified investment adviser.