risk

The risk of investing in this bull market

With the real interest rate getting closer to zero, investors particularly the baby boomers are now in a desperate search for a higher return on their savings. This means that most are investing in shares and although equities in the long term outperform cash and property, the share market is higher risk and offers significant risk of capital loss.

While there is a need to have exposure to the equity market, investors need to be alert to the risks and have a plan to exit the market as the danger signs become evident. This is imperative because with more and more investors coming into the market we have a developing bubble which can only end with a market collapse. From history we know that this has always happened and the current bull market is no different.   While the Australian bull market could continue for at least another few… Continue reading

The dilemma of the fund manager

Travel provides the opportunity to meet investors and investment professionals from a diversity of backgrounds and nationalities. On a cruise over past weeks I have had the opportunity to talk with a several fund managers from the United States and from the European Union. These were not the average mutual fund manager but tended to be conservative fund managers handling multi-million dollar accounts either for pension funds or for private clients of long standing.   Being aware that the bull market was over-heated they all seem to have been adopting a defensive approach over the past year which means that they have progressively shifted to more conservative stocks such as the in infrastructure sector or in most case have reduced their exposure to equities and moved to alternatives such as sovereign or corporate bonds.

By taking a more conservative approach these fund managers now hold portfolios which are under-performing… Continue reading

Is high exposure to equities risky at this time?

When one considers the obvious bearish divergences on most equity markets there is technically a high probability that a significant correction to world markets will occur soon.  When comparing technical signals, the current divergences we now see in most world markets are very similar to those divergence patterns which immediately preceded the bear market of 2008.

Given the very strong bull markets on most world markets over recent years a correction is very likely which would suggest that over the next year the returns from equities will be poor.  Are investors considering the risks of being heavily exposed to equities at this time? 

Investors in equities are chasing a yield of about 5% but not considering the probability of capital loss in a market correction.  This is a dangerous investment strategy particular for investors who are retired or who are approaching retirement. 

It… Continue reading

Investor psychology – a misunderstood an underestimated problem

Selecting and buying stocks for a portfolio is not easy. When discussing portfolio selection Markowitz stated that the process of selecting a portfolio could be divided into two stages.

  1. The first stage starts with observation and experience and ends with beliefs about the future performances of available securities.
  2. The second stage starts with the relevant beliefs about future performances and ends with the choice of the portfolio.

Using this approach the selection and purchase of an investment portfolio seems logical and straight forward and the investor evaluates the risk of investing based on observation and experience by considering a range of variables including inflation, interest rate movement, the economy etc. The investor should then be in a position to buy the stocks for the portfolio. But this is the problem stage because people are rarely rational in their decision making when it comes to investing. For example after a significant… Continue reading

Corporate bonds: the hazards of the search for yield

The search for higher yields has always lured investors into high risk investments. In this market, investors are looking for high yielding equities but high yielding bonds are also tempting.

The other day a broker suggested that I invest in a corporate bond. This was senior debt in an Australian company and it was returning 9% with a 6 year maturity.   What are the risks with this bond?  The following is my evaluation of this bond, (without actually naming it), based on available technical and fundamental data.

Let’s start with the chart which is not the chart of the company in question but is a chart which is very similar. The chart of this stock reveals some underlying problems: it is out of favour with the market and shows a strong downtrend for the past two years with a recent recovery. The old adage is “never buy… Continue reading

How stable are world markets?

Markets continue to go to record highs based not on economic growth but on quantitative easing by central banks. The question is how sustainable is this trend?

If we consider the charts of the major indices such as the DOW, DAX and even the FTSE, there is no technical reason to consider a market reversal. Other market indices are also useful. For example consider the one year chart of the VIX below. The VIX is an indicator of market sentiment and it is currently at an all time low suggesting that investors are confident that a market reversal is unlikely.
Vix jepg
Another index of world economic health is the BDI. The Baltic dry index below, is a sensitive measure of the health of world trade. The fact that the BDI is currently at its highest point in over a year suggests that world trade is improving. Admittedly this is coming off… Continue reading

The attitude of Australian investors to risk

I am a member of both the Australian Investors Association and the Australian Shareholders Association and have attended meetings and annual conferences of both organizations. In speaking to fellow investors of both organisations there are some trends which I find both interesting and of concern.

The average age of members at the recent Australian Shareholders Association conference was more than 65 and all of those that I spoke to were retired. Most of these investors had a very high exposure to equities and some holdings in term deposits. Very few of these investors hold corporate bonds. For example, in one conference session on fixed interest securities a show of hands in a group of more than 100 persons showed that fewer than 8% held corporate bonds.

The above comments are consistent with studies showing that Australian super funds are significantly more exposed to equities and less exposed to bonds than… Continue reading

Interest rates, the Australian dollar and inflation

Interest rates are of critical interest to the investor, particularly those with investments in fixed interest securities.  With a slowing economy, rising unemployment and a low inflation rate the Reserve Bank of Australia (RBA) is likely to continue to reduce interest rates over the next year.  This means that the return on cash and term deposits will be increasingly unattractive and more investors will turn to the share market.

One problem for the Australian economy is the very high Australian dollar which makes our export industries non competitive on world markets and so is an impediment to the growth of the Australian economy.  Normally the RBA would be able to control the value of the Australian dollar by lowering the interest rate.  The problem is that Australia has one of the highest interest rates in the world which encourages the carry trade, with a resultant flow… Continue reading

Risks in investing, manage them or avoid them?

Successful investing is all about managing risk.  There are many risks out there  that we need to be aware of and  the following is a summary of the most important ones.  

Specific risk, market risk, currency risk, regulatory risk, credit risk, financial risk, sovereign risk, liquidity risk etc.

While most of these can be avoided, specific risk and market risk cannot be avoided but must be managed.  While most investors seem to be aware that specific risk can be managed by using diversification and money management via the 2% rule, many investors underestimate the importance of market risk.  So they take care to carefully select stocks based on fundamental and technical parameters but much less attention is paid to actual market entry. 

As investors we do not need to be in the market all of… Continue reading

Risk and Return

Despite our strong linkage to China, Australian investors are still very much influenced by the world economy.  With the economic situation in Europe in a desperate state, all hope has been that American growth will solve the problems of the world economy.  Unfortunately this is very unlikely.  Last night US Fed chairman Ben Bernanke publicly announced that unless Washington came to grips with the fiscal dilemmas of taxes and expenditure then in the future the US may “not be able to pay its bills”.

The USD and US treasury bonds are seen as safe havens.   But investor attitudes to the security of America may change unless congress can address the problem and because of the US elections changes are unlikely until early next year. 

Investors are now very risk adverse with safely of capital now imperative.  It was interesting that Germany has now… Continue reading

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