Strategy:

Buy Volatility

As a financial planner, these days I'm often asked about how to make good, bad returns. At the risk of peddling my own bicycle the old fashioned buy up of volatility still holds best appeal. Buying slowly and steadily and not trying to time an investment market can take some of the risk (and greed-feeding) out of investment. This principal applies well to more volatile markets, like equities (shares). After the high volatility in equity markets over the last year, it seems an opportune time to revisit an important strategy for long term investors regularly buying volatility. Many investors, are influenced by their hearts rather than their heads when it comes to making investment decisions. Sentiment is a powerful force that swings relentlessly between exuberance and despair. Often, the greatest impediment to strategic success is our own behaviour. Put another way, natural emotion can lead to poor decisions. It's a well known fact that losing hurts more than winning (P. Delquie 2003). After many years of reviewing the best investments and the different cycles, I can tell you that there is no way to reliably predict the immediate future direction of share markets. The current turmoil is often compared to the Great Depression of the 1930's. It is true that bull markets often start when the background news seems dire, but this isnt always the case. During the 1929-1931 crash, the US market rallied by more than 60% from its initial 45% sell off in 1929 before finishing up almost 90% below its peak. The initial rally was misplaced; the Great Depression lasted another eight years! Scary stuff but even during that period, market sentiment moved up and down dramatically. The Dow Jones Index level fell 50% in 1931; rose 60% in 1933, and by 40% in 1935, but fell 30% again in 1937. Predicting short term movements in markets is a mugs game. So how do we overcome this problem of dealing with volatile markets that result from uncontrolled emotion and sentiment? The answer is: buy volatility! Put simply, investing equal dollar amounts at regular intervals imposes a discipline that dispenses with the need to worry about market uncertainty and volatility, and keeps the little green tendency in check... The way it works is that by always buying the same value of investments (for example shares) logically, more shares are purchased when the price is lower and vice versa. Science, or self-serving financial planner talk? Even during the 1930s Great Depression 'buying volatility' would have proved rewarding. This is despite the fact that the Dow Jones Index did not close above its 1929 high of 381.17 points until November 1954! Here is an example:

* Dow Jones Industrial index level Total Invested Total Units Purchased Investor Average Cost Investors End value Profit Index starting level Index ending level Index change over period $12,000 100.13 $12,000/100.13 = $119.84 per unit $150 x 100.13 = $15,019.50 $3,019.50 = 25% 300 points 150 points -50%

But you say '10 years is too long in the face of negative sharemarkets.' Ok, let's look at the results over 5 years: Total Invested Total Units Purchased Investor Average Cost Investors End value Profit Index starting level Index ending level Index change over period $6,000 56.14 $6,000/56.14 = $106.88 per unit $100 x 56.14 = $5,614 ($386) = (6.43%) 300 points 100 points -67%

Conclusion There is no trickery here, this can be observed with any investment. All you need is time and discipline. Stick to a strategy and avoid knee jerk reactions to short term market movements - in fact you may even learn to enjoy them. That is, dont try to second guess where markets are heading - no one can reliably do that. Acting on fear and greed impulses - that is, typical human nature - can result in buying at the top and selling at the bottom, which destroys wealth.

GV