Investing without feeling or forecasting

Investing without feeling or forecasting

You don’t need to feel or forecast for a good investment experience

In our previous article, we warned of the dangers of letting both your emotions and predictions/forecasts influence investment decisions. Often, your feelings will provide exactly the wrong guide to appropriate action.

But if you aren’t to rely on feelings and/or forecasts, how do you make investment decisions. One approach, that we favour, is to determine an appropriate risk exposure or asset allocation for you, based on:

  • Your attitude for risk;
  • Your need for risk; and
  • Your capacity for risk.

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Portfolio Diversification versus Portfolio Insurance

Portfolio Diversification versus Portfolio InsuranceHow can I protect against a loss of investment capital?

Since the GFC there’s been a lot of talk about ways to protect investment portfolios from the types of falls experienced in late 2008. There are two ways to overcome this risk: portfolio diversification or portfolio insurance (or hedging). We’ve compared the two in this article.

Portfolio diversification involves the practice of combining investments with low correlation to reduce the overall volatility of the portfolio. This invariably means holding some “losers” amongst your “winners”; a practice that often doesn’t sit well with a “winner’s” mindset.

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Revisiting the Global Financial Crisis

Revisiting the Global Financial CrisisHow did you feel during the depths of the GFC?

With the benefit of time, we tend to forget the strength of emotions we experienced in the past. I recently came across an email that we sent to a couple who were struggling with the uncertainty created by the Global Financial Crisis . It was written on 19th February 2009 – a couple of weeks before world share markets bottomed.

The email is a good reminder of the heightened emotions that prevailed at the time and the irrationality that they can produce. The couple were imagining all kinds of catastrophes and looking for any other solution than patiently sitting things out. Investor sentiment at the time was pretty low, with pessimists outranking optimists by seven to one.

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Wealth Management: a risky business

Share and property investments are risky …Wealth Management: a risky business

Most people understand that the returns of growth investments (i.e. shares and property) fluctuate considerably. If they didn’t prior to the Global Financial Crisis, they most certainly have a better grasp of that now.

But most don’t really have a good understanding of the potential range of variation of returns, without anything particularly unusual happening. And nor do they appreciate how dramatically the pattern of returns can affect long term wealth outcomes.

We use the Australian share market experience of the 25 years to December 2009 to shed some light.
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Forecasting the Market – Skill or Luck?

Forecasting the Market – Skill or Luck?How good is your crystal ball?

We’ve just been through (arguably) the worst share market downturn since 1929. We’ve also experienced a recovery that few predicted was possible at the start of 2009. Why were we not able to predict these events earlier and with more precision?

You may think it’s because you don’t have access to the information that the experts have. Yet most of the experts find successful predicting just as tough. While it was hard to ignore some of the apocalyptic predictions that were being thrown around during the depths of the downturn, acting on them would have proved very costly.

So, which predictions do you follow and which do you ignore? Or is there another way to manage your financial affairs.

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Investment Return Volatility – A Potential Wealth Hazard

Volatility: a wealth hazardInvestment return volatility is poorly understood

Most investors understand that in order to increase their expected future return, they have to accept a higher level of volatility (or variability) in the value of their investment portfolios. But beyond that, they do not understand just how damaging volatility can be to their wealth aspirations.

The amount of volatility you expose yourself to affects your probability of achieving a desired wealth outcome. In this sense, it is a forward looking concept. And, as such, it is an extremely important factor to take into account when designing and managing any investment strategy.

But this article reveals some poorly understood aspects of volatility, by looking backwards. That even when you know actual returns and actual volatility, wealth outcomes may vary dramatically.
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The Golden Rules of Investing

Golden rules of investingWhen it comes to investing, there is an inordinate amount of information and opinion that is freely available. Most people have an opinion about the direction of the economy, markets, which asset classes or sectors will do best, and which specific securities will out perform. And most of these opinions are supported by valid reasoning and sometimes by informational “evidence”.

But how helpful is this when investing?

To be a good investor over the long term you need to abide by some intelligent investment rules. Unfortunately, devising the rules is a much tougher act than coming up with forecasts and opinions. Following the rules is even tougher, especially when they may conflict with your forecasts and opinions.

The three golden rules:

  1. Never invest until you have an articulated, long term strategy with a clear set of rules for investing;
  2. Never disobey the rules;
  3. Never ignore the rules. To do so makes them obsolete. Replace them with revised and improved rules, but never ignore them.

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Market Timing? … that’s easy!

Market timingYears ago at a foreign exchange course we were asked to participate in a practical simulation game. Prior to commencing the game one of the participants had a moment of clarity.

Participant: “So, what you’re saying is that we should buy low and sell high?”
Organiser: “Well … Yes.”
Participant: “Oh, that’s easy!”

What seems so easy in theory is anything but in practice. It’s a valuable lesson which few learn until late into their investing lives. Timing your entry and exit from a market is an appealing concept that seems a simple and smart way to add value.

What is it that makes it so difficult to turn this theory into reality?
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This Time it’s Different

These words are often referred to as the four most dangerous words in investing. They are often uttered at the peak of bull markets but what about their application with respect to bear markets?

While every market cycle differs in terms of the specifics of the situation, the underlying influences can have similarities. A well-cited study performed by two finance professors from the University of Chicago found that financial markets are always vulnerable to what they called a liquidity shock — a sudden tightening of credit. These liquidity shocks have happened before and are likely to happen again. The 1991 recession is a recent example of a liquidity shock, where lenders shifted suddenly from easy credit standards to extremely tight credit standards.
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Fortune favours the brave!

fortuna-150x150If you’re feeling pretty uncomfortable about the current state of financial markets you can be reassured that you’re not alone. Almost all investors are experiencing some discomfort from the recent falls in asset values, yet some handle it better than others.

How you manage your emotions in relation to the market’s volatility can have a big influence on your investment outcome over the long term.

In this article we explore the influence of our emotions on financial decisions and look at what we can do in times like these.
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