The Impact of Fear

Read More

FearThe Impact of Fear

The impact of the turmoil in Greece on share markets is a classic example of how the emotions of fear and greed create volatility. When shares start to drop in value, investors can become fearful of sustaining further losses. This leads to panic selling which further fuels the fear. Eventually a turning point is reached where less risk averse investors spot the potential for gain. Increased buying activity pushes prices up, and fear is allayed. The outcome of this process is that risk averse investors suffer losses while gains go to those who are less risk averse.

Significant events can have a ripple effect on markets, just like a pebble being thrown into water. High levels of uncertainty create high volatility, and as the outcome becomes clearer, the uncertainty and volatility gradually decrease. Volatility is a test of true levels of risk aversion. It is easy to be a confident investor with a high exposure to growth assets when volatility is low and returns are high. Falling prices quickly reveal attitudes to risk. They also reveal insecurities formed from previous episodes of volatility. Memories of events such as the Global Financial Crisis can create irrational fear.

Diversification is one of the principal tools for reducing risk. The risk of investing in a portfolio with an adequate level of diversification is not a risk of loss but a time risk – that is, how long the investor has to remain invested in order for value to be restored and for the investor to be rewarded with a rate of return over the investment period which reflects the degree of risk taken. Volatility is a reminder that investment in growth assets is a long term game. If long term goals and strategies have not altered, short term volatility should be of little concern.

Related Articles

Liz Koh

Budget Winners and Losers

The latest Government budget had something for everyone but while most households will be a few dollars a week better off, there are some clear winners and losers. In the winners’ corner are businesses, those on high incomes, and savers. The biggest losers are property investors who have built large portfolios financed partly by tax rebates.

Read More »

Top Up or Miss Out

The end of June is an important date for KiwiSaver members. The financial year for KiwiSaver runs from 1 July 2009 to 30 June 2010 and if you have contributed at least $1,040 to KiwiSaver during that time, you will be eligible for the full amount of Government tax credit to be paid into your KiwiSaver account in July.

Read More »

Responsible Investing

There is a worldwide trend for investors to want to make a positive contribution to the world by investing in companies that are socially and environmentally responsible. If you are passionate about the effects of climate change, the scarcity of food and water, and social or environmental policies in general, then you will no doubt wish to ensure that the companies in which you invest are going about their business in a manner that is consistent with your views.

Read More »

Helping You Live your retirement To the Max

Keep in touch

Fill in your details and we’ll get back to you in no time.