This week all investors eyes and hears will be focused on Mrs Janet Yellen, Governor of the Federal Reserve, when she announces the decision on whether to raise US interest rates in June. The reason for this is that US interest policy directly or indirectly affects all global asset prices. Mrs Yellen thus sits with the unenviable task of normalising US interest rate policy in a world, which has become accustomed (addicted) to cheap money. Just like any addiction taking away the “fix” will be painful.
As a long-term investor prepare for increased volatility, but understand that volatility is not risk. Unfortunately the financial services industry measures risk as volatility of return creating the mistaken belief that risk and volatility is synonymous. Risk is quite simply losing your money permanently. There is really only three ways to lose your money permanently.
Number one and my personal favourite is the Ponzi scheme, named after the gentleman who first conned investors, Charles Ponzi. Once you have fallen for a Ponzi scheme your money is permanently gone. Number two, overpaying for an asset, all assets have an underlying intrinsic value attached to them, however at times an asset may trade well above its intrinsic value, which will result in permanent loss of capital for any investors who overpaid. Number three; invest in a business, which goes bankrupt. Apologies to any investors who have succumbed to any of these three, but it should not be that hard to avoid the before mentioned pitfalls.
How most investors lose money their money is not through the above, but through irrational decisions taken during periods of temporary loss of money associated with market volatility. The market crashes the investor panics and sells. The money is gone! And this is why risk and volatility have mistakenly become synonymous.
Don’t avoid volatility; counterintuitively this is when the best investment opportunities often present themselves. Investing is simple, but not easy and can at times, be very uncomfortable. The secret is patience and a cool head.
Mcomm, CFP®, HdipTax
T. 021-851 3746