In 2008, the VIX averaged 33. In 2020, it averaged 29. Both were crisis years. Both saw volatility shoot above 80 and trigger mass selling. But 2008 needed four years to recover, while 2020 needed five months. Same fear level, completely different outcomes. The fear gauge couldn't tell the difference.
Why Did Two Similar Panics Produce Opposite Results?
In October 2008, the VIX peaked at 80. In March 2020, it hit 83. Investors felt the same fear and saw the same losses. The emotional experience was identical. But 2008 led to years of sideways markets, while 2020 triggered the fastest recovery on record. The S&P 500 doubled in 18 months.
What Did Investors Get Wrong in 2020?
Investors in 2020 made a pattern matching error: they assumed the 2008 playbook applied. When VIX spiked in March 2020, they reached for that playbook. High VIX meant years of pain. Sell now, wait for recovery. But the playbook was wrong because the crisis was different. A pandemic shutdown closes businesses temporarily. A financial collapse destroys balance sheets permanently. Same fear, fundamentally different damage.
What Does the VIX Actually Measure?
VIX measures fear, not damage. It tells you how scared options traders are, not how broken the economy is. In 2008, banks were insolvent. Credit markets froze. The financial plumbing was destroyed. In 2020, businesses closed but banks were capitalized, credit flowed, and balance sheets remained intact. The VIX couldn't distinguish between them. But investors could have.
How Do You Tell the Difference?
When the VIX spikes, the key questions are: Is the financial system still functioning? Are companies facing permanent damage or a temporary hit? Is the crisis structural or short-lived? In 2008, the system broke, balance sheets were damaged, and the crisis was deep. In 2020, the system held, companies were merely paused, and the shock was temporary. The fear looked identical, but the reality and the outcomes were vastly different.
The VIX will spike again. Markets will panic again. And when they do, you'll have something most investors lack: the ability to distinguish between fear and damage. Not every crisis is 2008. Not every crash takes years to heal.
The investors who bought in March 2020 didn't have less fear. They had better questions. They asked what was actually broken, not just how scared everyone felt. That distinction is worth remembering.