Investing in Volatile Markets

Higher volatility in financial markets is being touted as the ‘new norm’. During choppy times in financial markets, investors are prone to making investment decisions based on fear.

Below are some tips on the different ways to manage the risk in times of high volatility.

Move to a more conservative portfolio

When markets are volatile, investors often want to protect their investment portfolio from any further falls in the share markets.

This can be achieved by selling down some or all of the growth assets and investing the proceeds in secure investments such as cash and/or term deposits.

Unfortunately, it is common to sell down growth assets after prices have already fallen. Nonetheless, this strategy can protect the portfolio against further market downturns, providing some peace of mind.

However, you may not necessarily need to take big steps by selling all or a significant amount of growth assets. Rather you can reduce exposure by making smaller tweaks. By doing this you will not only have some protection on the downside but will also provide some upside should the market recover.

Keep in mind that the sale of shares may also not be optimal from a tax perspective. There may be capital gains tax payable particularly on shares, or units in a managed fund, that have been held for a long time. If the shares or units are held within a super fund, the maximum capital gains tax payable is 10% and so the tax implications may be less compared to assets held in your own name.

The biggest risk of this strategy is the risk of attempting to time the market and getting it wrong and thereby missing out on any recoveries in markets which can often be very rapid and short lived. For example, investing in a term deposit for say three years limits the flexibility to move back into the market if the opportunity arises before the maturity of the term deposit.

A lower exposure to growth assets can also mean the likelihood of achieving higher returns is reduced should the market recover, which in turn adversely affects the future value of the portfolio. You may be planning for retirement and base your plans on achieving a certain level of returns over time that if not achieved, puts your planned future outcomes at risk.

There is another risk to consider. We are living longer and this poses a risk described as ‘longevity’ risk. The option of adopting a conservative portfolio may simply exacerbate the longevity risk because it limits the potential growth of the portfolio over time.

Switch to defensive investments

Investors can switch to securities and managed funds that have a more defensive characteristic. This may be due to the share or managed fund providing exposure to companies that are more defensive either because their business tends to hold up better during economic downturns and/or it pays a higher level of income, typically in the form of dividends or distributions that cushion the total returns from a fall in its price.

Certain assets like gold can perform well when there is greater uncertainty around the markets and these are sometimes considered defensive investments.

The specific nature of the investments needs to be taken into account. If switching to a different type of investment, its essential the risks and product specific attributes of this investment approach be well understood.

Another possible outcome of this strategy is that defensive assets may not perform as well as the overall market in the case of a market recovery.

As mentioned above, any switching of investments may result in realised capital gains and transaction costs, which certainly need to be considered.

Maintain the portfolio’s diversification

Diversifying the portfolio by spreading the investments across a range of assets and investments is one of the fundamental ways for managing volatility risk in a portfolio.

Investing across a range of assets including alternative assets and debt securities can be an effective means of protecting a portfolio against market downturns. Having a concentrated portfolio with exposure to only a few assets or investments increases the portfolio’s risk should one of the investments fail.

Consider dollar cost averaging

Making regular investments over time can avoid market peaks and troughs. This is done by buying more assets when prices are low and fewer assets when prices are high. This strategy reduces the risk of making a large investment at the peak of the market. Read more on dollar cost averaging.

Lower gearing levels

Other strategies to consider include reducing the gearing levels on portfolios where borrowings have been used to acquire shares or units. This may involve selling down investments to reduce the level of borrowing and/or contributing additional personal funds to reduce the loan to valuation ratios.

Lower levels of gearing reduce the probability of experiencing a margin call and the potential losses from a market downturn. On the flip side, if you have sold down assets to pay down borrowings, it also reduces the gains from any market recovery.

Putting it all together.....

There are a range of levers that can be used to manage the impact of market volatility on an investment portfolio. Each has its advantages and disadvantages and in some cases, a combination of strategies may prove to be a better outcome than simply relying on a single approach. The implications and risks of the different approaches should be well understood to ensure an informed decision is made.

Feb 15, 2012

http://www.ljhooker.com.au/investing-in-volatile-markets

Kylie's Tip of the Day...Trust is a Must

Selling is a team sport...your trust is imperative to make it work.

Tips on Communicating with your Agent

Your responsibility as the seller

• It is in your best interests to reveal to your agent your real motivation for selling. This can help them work tactically with buyers, particularly if an urgent sale is required. It also allows the agent to be sensitive to your needs. Not everybody is selling because they want to. Often a change in family circumstances or financial hardship may mean you are forced to sell your beloved home. You will appreciate an agent who is able to empathise with your situation.

• You and your agent are on the same team, it’s about working together not against each other. So don’t be afraid to give feedback to the agent if something is bothering you or if you feel their service is letting you down. It is better to speak up in the beginning to avoid the situation escalating.

• Saying what you really think can avoid wasting time and a faster, more direct outcome is likely. This is particularly relevant when it comes to pricing. Be honest with your agent from the outset; if you know you aren’t going to sell below a certain figure then make sure your agent is aware of this.

What to expect from your agent

• During your home’s marketing campaign, you should expect to hear from your agent almost daily. Receiving regular buyer feedback is vital, it may reveal that you need to alter your price expectations or improve the presentation of your home before any more open houses are conducted.

• Ongoing, honest communication between the agent and the seller helps to eliminate any nasty surprises that may hinder a successful outcome or create disappointment towards the end result. Once again, this is particularly relevant to your price expectations verse the reality of what buyers are willing to pay.

• An agent should be available to speak with you at almost any time of the day (within reason). Most real estate agents understand that selling houses is not a 9 – 5 job. You should expect missed calls promptly returned and regular face to face meetings, so you can have a good indication of progress made, current buyer interest plus an opportunity to voice any concerns or anxieties you may have.

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Kylie's Tip of the Day...Neighborly Neighbors (Part 2)

Let them know you're selling and offer to help with any work to the yard.

Making the Most of an Open Inspection

Getting organized prior to the inspection

Most of us have busy work, family and social schedules, which doesn’t leave much time for house hunting. On top of this, buyers are often faced with restricted property viewing times and crowded “open houses”, which can make it even harder to get a feel for the property and the agent’s attention.

Prior to viewing a property for sale, do your homework first. Look through photos online, floorplans, virtual tours and any other information that is available to you. Call the agent and let them know you will be coming through. Ask them what the price expectations are, land or apartment size and any other key questions (which we will discuss shortly).

If you are viewing multiple properties in one day, create a fact sheet for each as well as clear directions to get to each property. If you are racing from one to the other you don’t want to waste time getting lost. Also make sure you have all of the times correct and neatly listed.

It is also a good idea to do some comparable sales research. Websites like www.realestate.com.au and www.domain.com.au will give recent sales information at the bottom of the property listing page. This is a great place to start and can be followed up with more in depth research if the property ends up on your shortlist.


http://www.ljhooker.com.au/myljhooker:tips?p=suggested&id=4f28b8d5e24a89af0f00005c&sort=buying&keywords=&tag=

Kylie's Tip of the Day...Neighborly Neighbors (Part 1)

Throw the dog a bone before your open inspection to keep the peace.

Designing a Low Maintenance Garden

LANDSCAPE STYLE:

The style of garden you choose will have a major impact on how much upkeep will be involved. A Japanese garden, for example, is higher maintenance than you might think (lots of plants to clip, gravel to rake and water features to clean), as is a formal garden with its hedges, topiaries and patches of lawn in need of constant trimming. And a cottage garden, with its mass plantings, needs ongoing care to prevent it from looking out of control. Less fussy styles include Mexican and Tuscan because of their reliance on hard landscaping features.

SPECIAL FEATURES:

While undeniably appealing, special features like fountains, ponds, topiaries, hedges, parterre gardens and gravelled areas all require ongoing care and maintenance. If you really want to do the minimum you'll want to avoid all of the above.

CHOICE OF PLANTS:

Be smart about what plants you buy and where you put them. Basically, put shade-loving plants in shady spots and sun-loving plants in sunny, more exposed positions or you'll be engaged in a constant battle to keep them alive. And match your plants to local conditions so that they'll need less nurturing. Also, avoid messy trees, like jacarandas, or you'll be forever sweeping up dropped leaves and blooms and don't forget to check on the mature height of plants. If you place a tall-growing shrub under a kitchen window, for example, it will need regular trimming.

LAWN AREAS:

Lawns require a lot of work - mowing, edging, fertilising, weeding - so consider replacing yours with a paved area, garden beds, an expanse of groundcover or a wildflower meadow. If you do have a lawn, create a solid edge around the perimeter to keep the edges tidy and to make mowing easier.


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