Beat volatility by being prepared


It also looks as if we are in for a volatile year once again in investment markets. At this very early stage we have already seen some big market movements, in particular in China.

Mind you, I have had my share of volatility already. Rather to my surprise, we won the Rolex Sydney-Hobart yacht race in my yacht, Balance. My crew will kill me if I use the word luck too much, as we have trained solidly and put a lot of work into the boat, but in any aspect of life a bit of luck always helps.

It really is a volatile race. Ten TP52s similar to my boat were on the start line. One got hit by another boat, damaging both very badly. Another had rigging damage, so eight of us headed out of the harbour only to be smashed by a solid southerly at night. After about 12 hours of gale-force winds, pouring rain and big seas, just three of us were left. In fact, there were some 30 retirements in that storm.


Being at sea in these conditions in a lightweight carbon race boat is, frankly, awful. It leaps over and under waves, banging and crashing. Everything and everyone is soaked to the skin. Some are seasick. Given we don't have a kitchen, food is dried stuff in an aluminium foil container to which hot water is added. The pictures on the packet look nice but it all tastes like salty cardboard.

We tore the bottom of our main, so spent time in Bass Strait using a sailor's friend - sticky-back waterproof tape - to repair it as well as we could and off we went again. Much to our surprise we finished 7th on line honours - mainly because a bunch of big boats retired damaged - and were clubhouse leaders for overall honours.

Two days later, the rest of the fleet had arrived in Hobart but none in time to beat us. This was all a bit surreal. All 100-plus boats that enter each year would love to win a Sydney-Hobart but, given many of the best boats in Australia and terrific yachts from all over the world compete, the odds are not great.

Preparation clearly works for ocean racing and investment and I have been thinking about how my investments are set for future volatility. The solution is pretty obvious: diversification. Today, though, this can be done for ludicrously low fees. Just take a look at fund managers such as Vanguard, which, for less than 1% a year, can give you exposure to Australian or global equities. Exchange traded funds (ETFs), too, can be terrific, giving you exposure to specific asset classes or countries for a fraction of 1%.

I've mentioned this before, but new ideas such as the listed Future Generations funds are interesting. The manager and underlying investment specialist managers all donate their time, as does the board, in both their Australian listed fund (FGX) and their international fund (FGG). So they have basically zero fees but 1% of the fund is donated to charity each year. I have invested in the international fund.

Paul Clitheroe AM is founder and editorial adviser of Money magazine. He is one of Australia's leading financial voices, responsible for bringing financial insight to Australians through personal finance books, the television show Money, radio, and most notably this publication, which he established in 1999. Paul is the chair of the Australian Government Financial Literacy Board and is Chairman of InvestSMART Financial Services. He is the chair of Financial Literacy at Macquarie University where he is also a Professor with the School of Business and Economics. Click here to email Paul your money question. Unfortunately Paul cannot respond to questions posted in the comments section. Please view our disclaimer here.
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