06
Feb 2015

Handling volatility

Handling volatility

Written by Hudson Adviser Ivan Fletcher

If ever there was a time to return to some core investment fundamentals, it is now. Uncertainty is driving markets, which is often the precursor for many bad investment decisions. Below are some tips and reminders on how to “Handle the Volatility”.

 

1. Block out the noise

In the short term, markets move, sometimes irrationally, based on news, spin, politics etc. But in the long-term, markets return to the fundamentals. There is no doubt that bad news sells. As investors, we are paying far too much attention to market events and second-guessing the outcomes. Currently markets are jumping based on political rumour – and we all know better than to make decisions based on second-guessing politicians. Turn the TV (news) off if you need to.

 

2. Remember your personal objectives and income needs

For instance, retirees should have three years of the income portion of their portfolio in defensive assets, including an adequate level of cash. If this is the case, then you should not be dependant on access to your investment portfolio right now. This will help you to avoid selling assets prematurely at low levels or large losses.

Don’t invest money set aside for personal needs in the hope to catch a quick profit on a share market rebound. This is gambling, even if the odds look good for a rebound.

Often, in extreme market events investors get spooked, including retirees who are known for selling down in favour of cash. The golden rule is to invest according to your own goals – not based news and even worse rumours of news (which we have a lot of lately).

 

3. Know you own asset allocation

And avoid making the assumption that your portfolio is falling at the same rate as the various global stock markets reported in the media. For example, if your super is in a balanced fund you may only have 60% in share market exposures.

 

4. Minor adjustments - not wholesale changes

Refrain from making wholesale changes that involve moving large investments around. Fund redemptions and switches can sometimes take days or even weeks to finalise, and by then the market could have moved significantly (weekly moves of up to 5% are not uncommon in the current market).

However, sharp market movements can provide investors with an opportunity to realign their asset portfolio allocation towards their original risk profile.

Accumulators can use down times to re-weight to growth allocations. Retirees can use up times to re-weight to defensive cash and fixed interest. This approach is consistent with the old investment principle of selling some assets at higher prices and buying other assets at lower prices.

 

5. Recoveries and upward trends can be just as unpredictable as losses

Markets move quickly and if and when a recovery comes, it is also likely to be swift, so market timing and trading in and out could leave you even worse off if / when you get it wrong.

 

6. Dollar-cost averaging

Making regular investments over a period of time can help investors avoid the worst possible outcome (investing at the peak of the market). It also enhances long-term returns and helps with investor confidence. If you want to invest but can’t convince yourself that now is the right time – there will never be a right time. Fear of further falls or fear you have missed the boat (after an upswing) will always hold certain personality types back. If this is you, averaging into the market is a great way to break through your fears and commit to your long-term strategy.

 

7. Diversification

One of the most fundament rules to investing is diversification. Investors should avoid having a concentration in one asset or to one asset class. A classic example of this is self managed super fund investors who invest only in Australian direct shares.

 

8. Stick to your long-term plan

If you still maintain an investment horizon over a number of years from today, it is important to remember that it is the value of your investment in the future that is key and not the value today. Don’t let a paper loss become a ‘real loss’ if the plan was for longer-term investing.

 

9. Remember, share markets hate uncertainty

Uncertainty causes the volatility.

Today we know what the problems are (e.g. The US deficit and Euro sovereign debts) and the share market is also aware of this.

“Tomorrow holds the key to how those problems will be resolved and when this is better known, share markets again will have to adjust to the news.”

 

Sources: Christine St Anne – Morningstar | Alex Riley - Bunker Riley.

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06
Feb 2015

Why insurance is always part of the investment plan

Why insurance is always part of the investment plan

Written by Hudson Adviser Michal Park

Unfortunately sometimes here at The Hudson Institute we get some bad news and one such instance was of a long-time Hudson member diagnosed with breast cancer. No family history. She will undergo months of chemotherapy, radiation and hormone therapy to save her life. The impact of this diagnosis has taken an emotional toll that simply cannot be measured. Financially however, the cost can be measured. Cost of treatment + time off work = incredible strain on the already tight budget.

To mitigate the risk of this happening to YOU, there are a couple of ways to ease the financial burden:

Trauma Insurance – Also known as recovery insurance, this product is specifically designed to pay a lump sum upon the diagnosis of a major medical condition. Each insurance company has their own list of what defines ‘major medical condition’, but they generally include things like cancer, heart attack and stroke. You can use the lump sum payment however you wish, but the obvious ways are medical expenses, debt reduction and loss of income.

Income Protection – Also known as Salary Continuance Insurance, this product is designed to provide up to 75% of your salary if you find yourself unable to work due to accident or illness. This replacement of income can assist in providing a level of financial normalcy.

Unfortunately for the young family mentioned above, increasing existing and establishing additional insurances was something they had considered on a number of occasions (even just 6 weeks prior to the diagnosis), but never acted upon. From my experience, they are certainly not alone. I have found that the greatest barrier stopping individuals from applying for insurances is apathy.

If the above story is not enough to shock you into action (like is has me), I suggest you read the following few statistics lifted directly from the National Breast and Ovarian Cancer Centre website:

  • Breast cancer is the most common cancer among Australian women.

· in 2014, about 15,270 Australian women are expected to be diagnosed with breast cancer.
· in 2020, it is estimated that there will be 17,210 new cases of breast cancer diagnosed in women.

  • Cancer is estimated to be the leading cause of the burden of disease in Australia.
  • In 2012, breast cancer was the leading cancer cause of the burden of disease in women in Australia, estimated to account for 61,400 disability-adjusted life years (DALYs**). Of these, 40,900 were years lost due to premature death and 20,500 were years of healthy life lost due to disease, disability or injury.

**DALYs are years of healthy life lost, either through premature death or through living with disability due to illness or injury. This is the basis unit used in burden of disease or injury estimates.

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06
Feb 2015

What’s the property next-door worth to you?

What’s the property next-door worth to you?

Written by Hudson Editor Hayley Mcleod

Recently a friend of mine had the property next door to her become available for sale so they had it valued and made an offer. Turns out the neighbours on the other side also wanted the property and ended up paying more than what the property was valued at. Why you may ask? In some instances owning the property next door to you can add up to 30% more value to your existing property. There are a couple of reasons for this and it doesn’t always work for everyone.

 

  • If you sell both properties at the same time a developer might purchase both lots and redevelop the site (this assumes you are not in a character area and the area is zoned accordingly).
  • If you do not already have side access to your existing property (small lot) purchasing the property next door may give you this access.
  • If you don’t have a yard and would like to have one putting together a “reconfiguration of block” may allow you to have a yard while maintaining a yard in the property next door.
  • Purchasing an adjoining property may mean that you can keep your existing home, the home on the existing block and develop in one or both backyards.
  • You may be able to extend your current home and or install a pool or tennis court.

 

There are several reasons (some personal and some financial) that may appeal to owning the property next door. In my case I would like to own the property on one side of us because it is a rental and it currently has rowdy uni students living there, but that’s a case of buying so I can select my next-door neighbours. Something I don’t advocate unless you can really afford it. Things you need to ask yourself before purchasing are:

 

  • What do I want the property for?
  • Will it add value to my property?
  • Are there potential plumbing and stormwater implications if I want to reconfigure the block?
  • What will my council fees be if I want to develop and or reconfigure or rezone?
  • What will my holding costs be if I decide to hold onto the property for personal future gain?

 

Ultimately make sure you buy with your head and not your heart.

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