Understand what impacts your wealth.
Power of Inflation
For those who don’t understand the concept of inflation, inflation is the price increase of good you need to buy. Here’s an example. Assume you’re at the store buying groceries. You buy 4 steaks, a bag of potatoes, a case of water, and some chips – it costs you $100. Now assume a year goes by and inflation grew by 2%. You go back to the store to buy 4 steaks, a bag of potatoes, a case of water, and some chips. This time it costs $102 for the same items. That increase of $2.00 is due to the 2% inflation. So your $100 is now worth less (because it buys less) since you cannot afford what you bought before. If your $100 was invested for the year, and it grew to $102, you would have preserved your wealth. In 1970, if you went and bought groceries for $15.50, today you would need $100.00 to buy those exact same groceries. So if you left $15.50 in cash sitting in your account, not growing, until today you will find that your wealth has deteriorated significantly.
Risk & Volatility
Most recognize volatility as the standard measure of risk. The more the price of a stock, mutual fund, or other investment instrument fluctuate, the more volatile it is considered. In turn, this would suggest that the greater the fluctuation in the price of the investment, the greater the risk you take on. When looking at short term trades, the impact of volatility heightens risk - while in the long run, the risk of volatility is smoothed out.
For example, assume you have $100,000 invested in ACE Mutual Fund and the risk rating is high (has high volatility), if you need to withdraw the money in the first year you might find the value to have dropped to $90,000 or be as high as $110,000 – it’s volatile so the value varies more. However, if you look to withdraw the money in the long-term, say in 6 years, you might find the value of the investment to be anywhere between $170,000 to $200,000. Yes, the difference is still wide, but the underlying asset value has grow significantly, which smoothed out the risk factor.
After assessing your goals and objectives, your investments will be designed to account for short-term and long-term implications to ensure your wealth is always ready when you need it.
What is Hedging?
Everyone is happy when they’re making money, but with so many factors at play, downside risk becomes inevitable. Implemented parallel to the right strategies, cost efficient hedging can prevent your wealth from being exposed to both market corrections and recessionary risks. With the right hedge on investments that need it, we are able to help preserve your wealth when it becomes most vulnerable. Hedging is broad in how it works but serves to be powerful asset. Whether it involves capping downside risk with low carry options or shifting more weight toward non-cyclical investments, portfolios are designed to give you the level of protection you need.
Currency Risk: If you’re Canadian and investing abroad, you are exposed to currency risk. For example, if your global investment portfolio gains 8%, but the domestic currency has appreciated 6% versus the currencies abroad (Example Euro, USD, etc.), your portfolio return would be a under 2% after the currency conversion takes place. Controversy, if the currency depreciated 6%, you’ll find yourself enjoying over a 14% annualized return. Knowing when to put-on and take-off a hedge for your domestic currency will both protect your portfolio from underperforming and magnify the returns when properly exposed.
Impact of Central Banks
In today’s world, choosing resistant investments and making notable trading decisions go beyond the fundamental, technical, or even quantitative factors. A critical force that shapes investor sentiment, and by extension move the markets are the world’s central banks. Between the FED, ECB, PBOC, and BOJ there are larger forces at play; constantly making decisions that alter the way money flows around the world and how much of it there is. If money pours into one country due to it’s attractive interest rates, the domestic currency might find itself apriciating in value, which is turn can impact exports and profits and ultimately the market. We may also find central banks altering money supply, which can stimulate or destroy sectors and economies around the world by importing inflation or deflationary pressures in connected countries. In a world of globalization, one country’s decision impacts the world whether it’s intentional or not. Being aware of the world’s global macro outlook will ensure your investments are placed in areas that benefit from the decisions of the macro-economic players.