2013: The Year Volatility Died

The stock market in 2013 gave investors almost exactly what they wanted: sizable returns without any major correction along the way. But what drove such strong results, and can 2014 give investors another chance at such favorable conditions?

In the following video, Dan Caplinger, The Motley Fool's director of investment planning, talks about low volatility levels in the market and how they helped investors this year. Dan notes that the Volatility Index (^VIX 0.37%) is typically seen as a measure of fear, and it stayed relatively flat nearly throughout 2013. Volatility-linked investments iPath VIX ST Futures ETN (VXX +0.00%) and VelocityShares 2x VIX ST ETN (TVIX +0.00%) posted severe losses as a result of the lack of fear in the market. As Dan points out, just about the only way to make money on volatility was to bet against it, as the VelocityShares Inverse VIX ETN (NYSEMKT: XIV) almost doubled. Dan concludes by noting the dangers of assuming that markets will behave normally, especially with investments oriented toward shorter-term performance.