Let’s talk about volatility… The Finn Review
Volatility was back with a vengeance last month! And what we’ve realised is many of us haven’t experienced too much in the way of volatility in our investing career. All asset classes have had quite steady performance over the last few years.
So, let’s talk about volatility…
What is it? In simple terms, volatility is the amount of price change an investment experiences over a certain period of time.
Volatility is quite misunderstood.
A number of members reached out last month as they were becoming fearful about the security of their investments. What we often don’t understand is that when we’re investing over the long term volatility is actually our friend. It provides us with opportunities to purchase more of the same investments at cheaper prices.
This is additional principle No.4 of the WE Investment Philosophy:
“The Tuna effect: Be greedy when others are fearful, be fearful when others are greedy.”
Rather than thinking about selling, the right thing to do is to be thinking, ‘this is an opportunity to buy more’.
In the last edition of The Finn Review, I discussed my concerns over the price of cryptocurrency after logging into Facebook and seeing that every single post was pretty much about Bitcoin! At this point the price was above $20,000. During this month I observed the price drop down around $8,000 (that’s over 60% in a month).
What’s more interesting is now that the price has dropped, people are no longer talking about Bitcoin.
Why aren’t they saying this is the greatest buying opportunity ever? Nothing has fundamentally changed during the month, so if it was a great investment when it was $20,000, you’d assume people would be talking about throwing everything at it at $8,000, right?
It all comes back to the behavioural finance curve and how we are generally quite irrational in our investment decisions.
One way to increase your investment returns is borrowing to invest. This is often referred to as gearing. In property, we generally use a mortgage to ‘gear’. In share investing, we use a loan facility called a Margin Loan.
As long as the underlying investment return is larger than the interest cost, then you amplify your investment returns. WE utilise a loan facility through Leveraged Equities to accelerate our members’ chances of reaching particular goals.
We’re still confident in the market, however as we’ve had a long period of consistent positive returns, we’re reviewing our risk management for any gearing strategies currently in place. You can usually gear at a lending ratio of up to75%. As a rule, we prefer to be around a 50% lending ratio and are now looking at reducing that down to 30% to take some risk off the table.
Of course, everyone’s situation is unique and your Financial Coach will guide you through this.
We believe we’ll see continued volatility over the coming year and one of the strategies we’re looking at to benefit from this is to have these loan facilities set up and ready to go.
If there are periods where there are large corrections we’ll utilise the facilities to make investments to benefit from the reduced price. If your Financial Coach believes this is suitable for you they’ll reach out to you. Please reach out to them as well if you would like to know more.
Back to School
In our Investment Philosophy we have 9 core principles and 9 additional principles.
The first additional principle is: “Less transactions, the better.”
A psychological pitfall the majority millennials have as investors, and also in the advice relationship, is we feel as though we want to see a lot of activity in our portfolios.
WE believe there are two main reasons for this:
- Firstly, millennials are an impatient generation, and at at the same time we are “doers”. We’ve seen the success we’ve had in other areas such as our career progressions where we are always looking at the next best thing. We’re willing to jump for a slightly better title or remuneration package.
- Secondly, as we pay an ongoing membership fee, and one small part of this is to manage and advise on our portfolios, we want to see activity to justify our fees.
Unfortunately, these beliefs are counter-intuitive when it comes to investing.
One of the biggest expenses when it comes to investing is taxes, and every time we make a transaction we’re liable for capital gains tax.
With our members, this could result in nearly half of our investment return having to go to the tax man.
It’s often better if we can defer this tax liability to future years and increase the benefit of the 8th wonder of the world: compound interest.
If we set a quality, diversified strategy at the beginning, then we only need to make a small number of transactions to optimise our portfolios over time. This enables us to focus on the big picture rather than getting lost in the micro details.
Finn’s fun facts
More than 2 million Americans live on less than $2 a day!
This fact is obviously more sad than fun. However, if there are that many who can live on $60 a month, we must be able to find some areas to cut back in our budget to help accelerate our investing ability and ultimately speed up the time taken to achieve our goals, right?
I’m currently completing a Masters in Applied Positive Psychology and Coaching.
Of all the study I’ve completed to date, this course is by far the most enjoyable and applicable to my everyday life.
In a recent assignment I had to pick two positive psychology interventions and apply them in my own life. I had to then discuss the benefits that I found. One of the two I chose is referred to as Best Possible Self (BPS).
In applying this intervention, I chose to write for 10 minutes each day for a period of 14 consecutive days on how I would like my life to look in five years. In order to help ensure I envisioned a holistic future version of myself I chose to break it into five categories:
- Community, and
I finished each writing session with two minutes of visualisation to make the vision of my future life more clear. Then, I set a micro goal in each of my categories to avoid overwhelming myself and to increase the attainable positive outcomes.
Already I’ve seen a dramatic improvement in my overall sense of well-being and have had a number of experiences where things felt as though they were all just falling into place.
I challenge you to do this exercise as well. See what you come up with and what improvements you find in your well-being. I’m confident this exercise will help you gain more clarity around what you want in life and then you can share it with your coach who can help create a strategy to achieve your new vision and also keep you accountable and on track.
Disclaimer: all information contained within this article is of a general nature. It should not be relied upon when making financial decisions. Please consult a professional financial advisor or planner (like us!) before acting.