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Greed, Fear and Investments

There is a saying in financial circles that stock markets are driven by two emotions – fear and greed.

Wendy Foley

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There is a saying in financial circles that stock markets are driven by two emotions – fear and greed. Whilst this might be an over simplification, these are two of the biggest psychological effects of investing and both of them become very apparent during volatile markets.

Greed

Most of us want to make as much money as possible in the shortest period of time.  Research has shown that the best way to acquire wealth is by having exposure to the share market. When the market starts to climb steadily the emotion of greed starts to take over.

As the good news and rising markets continue, investors become over confident and often assume that the good times will continue unabated. In their minds this signals an opportunity to invest more and this drives the markets even higher whilst the investor reaps the rewards that they have come to expect.

This irrational exuberance will result in over inflated markets and stock bubbles which will burst at some stage.

A perfect example of this is the dotcom boom of the 1990s where any share that was internet based became a buying opportunity driven primarily by greed. As soon as the dotcom bubble burst investors flocked out of technology stocks in a flight from risk and moved into less risky asset classes such as cash to protect what was left of their original investment.

In doing so the investors locked in their losses, they were now invested in cash earning a low rate of interest with no hope of making a capital gain. In their panic they had forgotten a few of the fundamental rules of investing in shares.

  • Buy into stocks that you believe in for long-term growth
  • Think long term and
  • Do not focus on the short term noise.

Fear

Just as a market can become overwhelmed by greed the same can happen with fear. When markets suffer large losses for a sustained period of time, the overall market can become fearful of making further losses.

But being too fearful can be just as costly as being too greedy – in some cases investors become paralysed by their fear and tend to move out of their stocks at the bottom of the market into more secure, low risk, low return investments such as cash.

After locking in a loss, the investor then becomes nervous of entering back into the market for fear of making further losses.  In many instances the investor moves back into the market once he has seen the share values increase and he will often buy into the share when it is at a high.

The mass exodus out of stocks shows a complete disregard for a long-term investment plan based on fundamentals. Investors threw their plans out of the window because they were scared, overrun by a fear of sustaining further losses.

What is the answer to emotional investing?

Fear and greed will always drive the stock market and will have an influence on the way that people react to market volatility.

The “get rich” mentality is a very enticing proposition to envisage but it is important to follow sound fundamental investment principle such as the following:

  • Know how much money you can afford to lose by being exposed to the share market.
  • Understand the risks associated with being invested in shares.
  • Take a long term view on shares.
  • If you lose money on the market, can you afford to sit it out and wait for it to recover.
  • Avoid getting caught up in the dominant market sentiment of the day which is often driven by fear and greed.
  • Stick to the basic fundamentals of investing.
  • Select an appropriate asset allocation mix taking your personal tolerance for risk into account.

It is important to understand the effect that our emotions have on our investment decisions and it is equally important to employ the services of an accredited Certified Financial Planner to look at your investment plan holistically and to guide you through the investment principles and decisions that would be suitable for you.

Wendy Foley CFP® is a certified financial planner at Consolidated Financial Planning and a member of the Financial Planning Institute. Wendy has 25 years experience in the Financial Services industry and she has acquired invaluable experience in financial planning from companies such as Investec and Alexander Forbes. For more information visit www.consolidated.co.za

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5 Insider Tips Every Trader Needs to Know

Here are five insider tips that every trader needs to know.

Ethan Featherly

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Like in every profession, there are a lot of figures circulating regarding how many forex traders actually make money, and how many traders lose more money than they earn. We are not going to launch into speculations that we can’t prove with accurate statistics. However, there is one thing we can say without citing any official sources: there are more people losing money than those earning.

Why? The answer can be found in the annals of human psychology. Some go into forex expecting to get rich overnight, while others do not (understandably) have the time to dedicate themselves fully to this activity. So what can you do, concretely, to join the group of people earning money? Here are five insider tips that every trader needs to know.

1. Choose a Methodology and Stick With It

Even before executing your first trade, you need to have a rough idea on what you will base your decisions on. In this sense, you must know what intel you will need to make the appropriate decision, like when to enter and exit a trade, which timeframes are the best (more on that later) and so on and so forth.

Some people are partial toward fundamental factors (foreign investments, inflation, unemployment rates, and other economic indicators), coupled with a chart, for executing a trade. Others prefer the raw numbers and stats of technical analysis.

But, whichever methodology you choose, make sure to be consistent and that it is adaptive, as there is no objective way to tell if one is truly better than the other. The most important thing to consider is whether or not your methodology and the strategies built around it are adaptive enough to keep up with the changing dynamics of the forex market.

Related: How Founder Of 27four Investment Managers Drove Transformation In The Industry

2. Always Calculate Your Expectancy

Expectancy is a formula that traders use to determine how reliable their trading system is. It involves going back in time to your previous trades (a journal will come in handy here), measuring how many traders were winners versus losers, and then finding out how profitable your winning trades were as opposed to how much money was lost after bad trades. The formula is as follows:

E=[1+(W/L) x P – 1, wherein W is the average winning trade, L represents Average Losing Trade, while P is Percentage Win Ratio.

3. Define Your Trading Goals and Build a Strategy Fitting of Your Personality

forex-tradingMost forex beginners come into the market thinking that they know everything that one could possibly know, without any sort of long term plan or concrete goals. This is the one mistake that eventually leads most traders to quit forex, because the reality of the market – and the trade itself – will hit them straight on sooner rather than later.

Therefore, the first thing you need to do is set a couple of goals. Start small and realistic at first – do not set yourself for winning a ridiculous amount of money in the first months because you will be sorely disappointed.

After setting the goals, you can start looking at various trading strategies and see which ones will help you achieve these goals and, most importantly, whether or not they are a good fit for your personality.

Some helpful questions to ask in this case are in the lines of ‘’Do I feel comfortable holding positions overnight?’’ or ‘’How much risk am I willing to assume for a given trade?’’, ‘’Am I more comfortable following a trend or betting against it?’’, ‘’Will I trade to gain some additional income, or full time?’’. Another equally viable method which will help you asses your strengths and weaknesses is doing a personal SWOT analysis.

4. Make use of Multi Time Frame Analysis

Regardless of whether you are a swing, day or long term position trader, it is highly recommended you always approach trading in a top-down fashion. This technique involves starting with a higher time frame chart and gradually zooming down to your current trading time frame chart. By doing this, you can get a ‘’big picture’’ view of the price action.

This tip is important because many traders commit the grave error of building their trading decisions around the time frame in which they are currently trading. For instance, when a trader sees a hammer candlestick pattern on a five-hour chart, they push forward with the trade without considering what might happen in the following time frame. What you are doing here is similar to a game of chess – you have to think a few steps ahead and choose your forex trading products and tools wisely in order to land a successful trade.

5. Do Not Use More Indicators Than Necessary

Indicators are simply visual representations of market realities that show things such as price movements, patterns and the like. As useful as they are, after trading for a while, you will soon realise that at some point they become quite counterproductive.

Many traders will tell you that the only indicator that you need is price, and everything else is there just to make one understand how the market got to that point. And since succeeding in the forex market is mostly about getting in on a trend before anyone else spots it, you can probably guess why over-crowding your monitor with indicators is not such a good idea.

Conclusion

Whatever some might tell you, forex is not a walk in the park. Like everything in life, it takes hard work and dedication to reach the point where you can state without doubt that you have achieved excellence. However, even the most dedicated and hard-working traders need a push in the right direction in the form of some lesser known insider tips that only traders will know. Hopefully, the tips in this article will provide you with the insight necessary to take your trading efforts to the next level.

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Investing

The Comprehensive Beginner’s Guide To Investing (And Growing Your Personal Wealth)

Are you a first time investor? You may want to get some guidance before you know your way around the investment world. We’ve got you covered! Read on to learn more about the best types of investment options, strategies to grow wealth and the dangers and pitfalls to avoid in investing.

Diana Albertyn

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Why should I invest?

Keeping your life savings in your back pocket or under a mattress isn’t going to bring you the wealth you desire. “There are only two ways to make money in our modern world: By working, for yourself or someone else, and/or by having your assets work for you,” says trader, advisor, and author Alan Farley.

Investing means your money is working for you and gives you the opportunity to grow what you save or receive through inheritance. As an investor, you’ll generate money through interest on what you set aside or by purchasing assets that compound in value.

When is the best time to invest?

Start today. When it comes to investing, the magic of compounding is best achieved when you realise that time is of the essence. “Compounding makes your money work for you by earning returns today on the returns you earned yesterday,” explains Thandi Ngwane, Head of Strategic Markets at Allan Gray.

“If you start early and save consistently over long periods, less of your total amount saved will be from your contributions and more from growth.”

The earlier you begin contributing to your wealth, the more significant these deposits will be later, as your money has much longer to grow. You’ll also be able to contribute less as retirement age approaches.

But what happens if you didn’t save and invest right from when you received your first salary in your teens or twenties?

What can I do if I am only starting to invest in my 30s?

More than half of us only start saving at age 28, instead of when we start working, according to Discovery Invest. And many more adults only consider investing in their 30s, with a large number starting only when they hit 40.

Catching up on the compounded returns you could’ve accrued over the last five, 10 or 15 years becomes much more difficult with the added expenses of a typical 30-something-year-old. Major life events such as buying a home, getting married, having children and starting to save for their education can be expensive when you’re also investing in your future.

So, how do you overcome these major life events while still investing for the future? According America’s Millennial Money Expert, Robert Farrington: “The goal is financial balance. You can do both – save for the present and save for the future. But it requires a little more thought and effort.”

  • Determine your investment choices based on your personal goals and risk tolerance
  • The best way to build wealth in your thirties is still through saving, so select a portfolio allocation that matches your risk appetite
  • Maintain a diversified portfolio of low cost ETFs.

What can I do if I am only starting to invest in my 40s?

If you’re 40 and over, your main financial focus should getting out of any debt you may still have. “Becoming debt-free and then you should focus on taking your savings to the next level,” says Schalk Louw, portfolio manager at PSG Wealth.

He advises you put any additional income – salary increases and bonuses – towards higher pension fund contributions, savings or paying off your debt. “While my preference for long-term savings will always be a share portfolio, those who find its risks too high, can always consider a savings account,” says Louw.

Related: How To Make Money Investing, According To Ashton Kutcher

What should you start investing in?

business-investment

So, now that you’ve established that you’re ready to invest, you should be considering your options. First, let’s look at the basic investments to start with:

1. Investment accounts

If you’re looking to save towards long-term financial goals, this is the type of account you should consider opening.

This investment can be used, for example, to supplement your pension or other income upon retirement, an investment account is an ideal way to maintain a good standard of living. An investment account is designed to set aside assets like stocks and bonds as income during retirement, to save money for your child’s education, or to put down a deposit for your first home.

2. Equities

Buying shares or equities gives you ownership of a certain percentage of a company. As a shareholder, you’re paid dividends – a portion of the companies’ profits. Shares are a risky, but beneficial form of investment. On the one hand, a decline in share price reduces the value of your investment, while the benefit of dividends is that they attract less tax compared to the other sources of investment returns.

Shares may take a significant amount of time before yielding dividends, but for long-term success, when your dividends pay out, they can be used either as income or as a reinvestment into your share portfolio.

“The combination of dividends and the growth in capital market value of your shares over time is the total return for your investment,” according to Discovery Invest. “It therefore gives you the best chance of beating inflation.”

Some of the pitfalls of equity investment, says Craig Hutchison, CEO Engel & Völkers Southern Africa, include:

  • Share prices for a company can fall dramatically
  • If the company goes broke, you are the last in line to be paid, so you may not get your money back
  • The value of your shares will go up and down from month-to-month and the dividend may vary.

Reduce your risk by investing in various sectors and shares.

3. Unit trusts

If you’re seeking an investment that provides you with easy and affordable access to financial markets, unit trusts are an option. Not only is this a smart way to save, while beating inflation, but a unit trust offers you exposure to a range of assets, explains Hutchison.

“Your money is combined with the money of other investors who have similar investment goals,” explains Ngwane. “Our investment managers use the pool of money to buy underlying investments to build a portfolio that is then split into equal portions called ‘units’. Units are allocated to you according to the amount of money you invest and the price of the units on the day you buy them.”

Hutchison notes the following disadvantages you should be aware of before investing in unit trusts:

  • There are costs over and above those you’d pay if you were investing directly
  • Unit trusts may not be as liquid as some other investments
  • Reliance on managers to select the best appropriate funds.

Related: Now Almost Anyone Can Invest In A Hedge Fund

How can you continue to grow your portfolio?

portfolio-growth

More complicated investment options

Investing in the JSE

When buying shares, there are three crucial considerations to be made: Which company’s shares  to buy, the number of shares you want and how much you’re willing to pay for them.

The next step is an online, in-person, or telephonic discussion with your broker who’ll then forward your request to the JSE. Thereafter, your bid joins other requests to buy or sell shares on a central order book.

Finally, should the price you’re offering match with a seller at the same price, the JSE will ensure the transaction takes place, making you the new owner of the shares you requested.

Be aware of the risks

You could lose everything if you invest in one share and that company goes bankrupt. “You can diversify by buying into many different shares. An easy way to do this is to invest in something like an exchange-traded fund (ETF),” suggest experts from the JSE. “An ETF is essentially a basket of shares. You buy the basket and get anywhere from 10 to 600 different shares in that basket, reducing the amount you would lose if one company were to go bankrupt.”

Online share trading

As a potential first-time online investor, you may begin your journey by surfing a number of online share trading websites either those offered by all the major banks, or other providers.

“The biggest investment you make at this stage is in time,” says Brett Duncan, head of Standard Bank Online Share Trading. “You need to spend at least seven hours a week educating yourself – either studying newspapers or financial magazines, or tracking your portfolio.”

Be aware of the risks

According to PSG Online, no one should trade shares unless they have instituted risk control measures such as putting ‘stop loss’ controls in place. Share trading requires a high appetite for risk, time to watch the markets and an expert knowledge of the markets and trading process.

Darren Cohen, head of marketing at PSG Wealth, explains: “Making an informed financial decision is key to mitigating risk where one has considered the options that would best suit their personal needs. It‘s for this reason that client education is imperative to PSG Online’s mission of creating wealth for our clients.”

Offshore investing

This type of investment affords you two options, says Maarten Ackerman, chief economist and advisory partner at Citadel: You can either take money out of the country by converting it into hard currency and investing it overseas, or you can choose a rand-denominated investment via a South African unit trust.

Should you select the second option, your money is consigned in a rand-denominated asset-swap fund, and the unit trust uses that money to invest offshore. When the money is eventually repatriated, it will be paid out in rands.

“Politically risk-averse investors will prefer to make use of direct offshore investing, as with this option the investor never has to repatriate or convert their investment back to rands,” says Magnus de Wet, director of Vista Wealth Management. “With a weakening rand, direct offshore investing would be the preferred investment approach.”

Be aware of the risks

Investing in any type of commodity involves potential loss. Two of the measures you can take to reduce risk are:

  • Investing in low risk commodities, for example, a fixed deposit with an offshore bank
  • Diversifying your offshore investment portfolio adequately to balance out high risk offshore investments with more conservative, secure investments?

As a newbie to investing you be risk averse, so high-performance offshore investments, although brimming with the promise of very high returns, are not recommended until you know your way around turnovers and returns.

Related: Becoming A Self-Made Millionaire: 5 Things To Do To Become Wealthy

How to make money investing

business-investment-cash

Contrary to popular belief, you don’t need (a lot of) money to make money. Wealth isn’t a prerequisite for investing. You can take advantage of investing over time, if you start sooner rather than later. While this means you’ll have to wait a little longer before quitting your job in favour of early retirement and living off your dividends, the long-term rewards are lucrative.

Remember these crucial pieces of advice before making your investment decisions:

  • Diversify your portfolio, so you never have all of your money invested in one account, venture or business. The best way you can manage risk is by not putting all your eggs in one basket
  • “Be careful who you trust with your money, make sure you invest your money with a reliable and established company with a solid history and reputation, do your research and do not be afraid to ask questions,” advises Craig Hutchison, CEO Engel & Völkers Southern Africa
  • You can achieve a great deal by simply investing or saving portion of your salary every month
  • Know the difference between investing and saving. “Saving is storing your money, while investing is growing your money,” he says. “One of the significant differences between the wealthy and not-so-wealthy is that wealthy individuals earn interest while everyone else pays interest.”
  • “The way that the prosperous continue to build their wealth isn’t really a secret – they spend less than they earn, save the difference, and let the potential of compound interest make their riches grow,” says Hutchison.

“Financial wellbeing is a long-term commitment, but with the right guidance, discipline and savvy decision-making, you may achieve your goal sooner than you think. It is never too late to start investing in your financial well-being,” he concludes.

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Investing In Wealth-Generating Assets

With returns of between 10% and 16%*, impact investing offers more than just the chance to do good.

Fedgroup

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Through a combination of innovation and technology, investors are finally in a position to own a stake in lucrative farming operations without high cost barriers, while at the same time having a positive impact on the environment.

Global trends, local applicability

There has been a recent trend towards socially conscious investing, known as impact investing, which has gained significant traction in first-world markets. Younger investors in particular want their money to do good in the world, but still expect a good return on their investment.

This trend, combined with the desire of many entrepreneurs to own a viable side-hustle, provided the impetus behind the creation of Impact Farming by Fedgroup.

Impact Farming differs from conventional impact investments in a number of ways. Other impact investment products usually consist of portfolios that offer access to shares in companies that meet certain social and environmental criteria. South Africa’s leading independent financial services provider, Fedgroup, in contrast, believes that investing directly in ventures is a smarter alternative.

Related: Balancing Business And Investment Risks

The perfect side-hustle

bee-farming

That’s because investing in shares and funds can be unnecessarily complex and often diminishes returns through hidden costs. In addition, barriers to entry can be prohibitive. Fedgroup has therefore leveraged the ubiquitous nature of mobile to deliver a fast, lucrative way for investors to directly own assets in high-yield farming ventures. It’s the perfect side-hustle, without the hassle.

Fedgroup’s Impact Farming investment platform offers investors access to a growing network of local crowd-funded farming ventures that generate solid profits to deliver competitive returns. From as little as R300, investors can own assets across three different ventures, blueberry, sustainable honey and urban solar farms.

Investors buy assets at one of Fedgroup’s approved sites, forming a venture network that is managed by farming experts.

Tax benefits and passive incomes

Investors get paid in regular cycles for the yields their assets produce once they are harvested and sold to Fedgroup’s contracted customers. This money can then be enjoyed as passive income or reinvested to benefit from compounded growth. Impact Farming assets also qualify for a tax benefit associated with renewable energy and sustainable farming.

Not only does this model significantly lower the barriers to entry inherent in traditional fund investing, but it also allows socially conscious investors to make a big impact with their money, regardless of the amount invested.

And there’s also less risk compared to various traditional investments thanks to the innovative approach. Extensive due diligence is performed on every product line to ensure its viability before it is brought to market. The company then carefully vets and selects Impact Farming ventures for both the financial impact they have on investor wealth creation, and the positive impact they have on the world.

Related: More Than Sun In Your Eyes: Fedgroup’s Impact Farming Solar Offering

Considering risk

Fedgroup also built market-tested financial models that were deliberately designed to be conservative when forecasting returns. However, as the profits from investor assets are pooled, so too are the yields, which mitigates the risk of individual assets underperforming. And with service level agreements in place with providers, Fedgroup ensures that assets continue to perform in line with projections, unlike the unpredictable nature of company shares.

The assets are also insured, the cost of which is included in the purchase price. Therefore, if an investor’s asset is ever destroyed in a natural disaster, Fedgroup replaces it. This asset class also runs counter to market cycles and therefore offers diversification that is virtually unmatched.

Fedgroup’s Impact Farming platform offers a unique wealth creation tool for a new breed of investor.

* The projected returns of between 10% and 16% per year are the asset owner’s internal rate of return (IRR). This is the rate of return after the initial purchase price has been subtracted, and which also takes into account the time value of money. For instance, a R4 000 beehive is projected to produce a total income in excess of R9 000 over its 10-year term, which represents an average return of 23% per year. If the IRR calculation is applied, it provides the projected IRR of 15% p.a.

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