Investing for Twenty Good Summers by Martin Hawes

Author:Martin Hawes
Language: eng
Format: epub
Tags: ebook, book
ISBN: 9781741765649
Publisher: Allen & Unwin Pty Ltd
Published: 2010-05-26T00:00:00+00:00

Chapter 7

Managing risk

Lakes and rivers

You must be ready for volatility and as such need to arrange your money so that you always have ready cash. Holding a good amount of cash at all times is critical if you are to be able to meet your expenses on an ongoing basis. Therefore you need to smooth out the investment returns that you get by putting in a buffer. I see this as a lake (or reservoir) of cash. In good times, the returns from your investments will flow into the lake raising the level; in bad times you are then able to draw on the reservoir that you have created thereby lowering its level. Having this lake that controls and buffers the flow of returns means that you do not have to sell your core investments (bonds, shares and property) during the bad times. For older investors, volatility can be a killer and wreck lives. If your money is not well arranged and you do not have enough cash, volatility can turn you into a forced seller, just at the time when you should not be selling.

For a young person, volatility is not a great problem. People in their twenties, thirties, forties and sometimes in their fifties can tolerate a lot of volatility because they have no need for their savings as they have their jobs to give them their day to day incomes. They also have time for the markets to rectify a major downturn with the major upturn that will eventually follow. These factors mean that younger people can afford to be very heavily weighted towards shares and property. The volatility shouldn’t bother them and they know that they will get higher returns over time.

However, people who are dependent on their investments to give them income so that they can get on with enjoying a limited number of summers are in a completely different position. They cannot tolerate volatility. The ups and downs can wreck their lives, ruining every dream and plan that they had for their later years.

Volatility is a life wrecker. Markets are cyclical—good times follow bad times and vice versa. The worst thing that can happen is for you to become a forced seller—that is, to be in a position where you have to sell investments regardless of whether it is a good time or a bad time (it is almost always bad times that people sell into).

People can and do get caught in bad economic times: their returns are down and so they have to sell out of some investment and use the capital to live on. They get poor prices for the investments that they sell and therefore have less capital when the market starts to rise again. Worse, many people will have nothing in certain markets because they have been forced to sell. They are out of the market and so do not enjoy the upturn when it eventually comes.

There is some simple mathematics that you need to be aware of: a relatively small fall in the markets needs a much bigger rise to put you back to the same position.

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