{"id":23650,"date":"2011-09-06T08:00:31","date_gmt":"2011-09-06T12:00:31","guid":{"rendered":"http:\/\/countingpips.com\/fx\/?p=23650"},"modified":"2011-09-06T08:00:31","modified_gmt":"2011-09-06T12:00:31","slug":"three-steps-to-wealth-leverage-volatility-and-risk","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/fx\/2011\/09\/06\/three-steps-to-wealth-leverage-volatility-and-risk\/","title":{"rendered":"Three Steps to Wealth: Leverage, Volatility and Risk"},"content":{"rendered":"

By Kris Sayce<\/strong><\/abbr><\/p>\n

In yesterday\u2019s Money Morning<\/a><\/em> we signed off with this thought:<\/p>\n

\u201cThink about it this way: the long-term average annual gain for stocks is about 11% per year \u2013 give or take a few per cent. But if you play smart, you can make roughly half of that by sticking a wad of your money in cash or a term deposit.<\/em><\/p>\n

 <\/p>\n

\u201cThe trick, of course, is how to make up the extra 5-6% you need to mirror the long-term performance of stocks?<\/p>\n

\u201cThat\u2019s where you use stock market leverage, volatility and risk to your advantage.\u201d<\/em><\/p>\n

But before we get stuck into that, a quick note on this year\u2019s Gold Symposium<\/a>. This is an event our colleague, Australian Wealth Gameplan<\/em> editor, Dan Denning has spoken at for the past few years. He\u2019s speaking at this year\u2019s event too.<\/p>\n

As an added bonus for attendees [wink]<\/em>, your editor is set to chair day two of the Gold Symposium.<\/p>\n

Keynote speakers that day include Eric Sprott of Sprott Asset Management, based out of Toronto. And Ben Davies of Hinde Capital, based in London.<\/p>\n

If you\u2019d like to check out the programme, click here<\/a>. And if you\u2019d like to register for the two-day event in Sydney at a cost of just $199, click here<\/a>.<\/p>\n

Oh, by the way, we don\u2019t get a kickback or anything if you register. We just mention it because it\u2019s something we think you may be interested in\u2026<\/p>\n

And as you know, gold is one of our must-have components in an investment portfolio. And we don\u2019t just mean the 3-5% rubbish some of the mainstream advisors now recommend. They\u2019ve just jumped on the bandwagon so they can say, \u201cYeah sure, we recommend gold\u2026\u201d<\/em><\/p>\n

But even those guys are in the minority. 98% of financial advisors wouldn\u2019t have a clue about gold, let alone recommend it.<\/p>\n

Anyway, you know our position on the shiny metal. So we won\u2019t labour the point. There are other things to discuss\u2026<\/p>\n

 <\/p>\n

The glum 10-year record of stocks<\/strong><\/div>\n

 <\/p>\n

Back to yesterday\u2019s cliff-hanger: just how do you make up the extra 5-6% you need to match the long-term performance of stocks?<\/p>\n

The first answer I can give you is: don\u2019t<\/span> invest in an index. For the past 10 years, the S&P\/ASX 200 has gained a whopping\u2026 26.4%.<\/p>\n

That\u2019s an average non-compounded gain of 2.64% per year. That\u2019s terrible.<\/p>\n

Of course, if you add dividends, the result is better\u2026 From June 2001 to June 2011 you would have doubled your money, assuming you were able to reinvest all dividends.<\/p>\n

But here\u2019s the thing. Most of the return has come from income, not capital growth.<\/p>\n

That tells you, for growth investors, betting on the index and blue-chip stocks won\u2019t get you anywhere fast.<\/p>\n

Most of the return \u2013 three-quarters of it \u2013 has come from income. But in order to get the income, investors have had to sit through an extraordinary period of gut-wrenching market volatility. To sit back and keep cashing the dividends while stock prices fall takes nerves of steel.<\/p>\n

But let\u2019s be honest, most folks don\u2019t have nerves of steel. Most aren\u2019t hardened investors\u2026 they\u2019re just people who want to make a decent living.<\/p>\n

People who want enough saved for retirement so they don\u2019t have to live off tinned hotdogs, wear op-shop clothes or rely on the crappy public health system.<\/p>\n

What we\u2019re getting at is this: why have sleepless nights with all your cash in the stock market if the stocks you\u2019ve invested in are only giving you income rather than capital gains?<\/p>\n

Why wouldn\u2019t you relax by having most of your cash tucked away in the bank? (We\u2019re no fan of the banks. That\u2019s why you should hedge your cash position by holding a decent position in gold.)<\/p>\n

But, that doesn\u2019t mean you should put all your cash in the bank. Not while there\u2019s the opportunity to use leverage, risk and volatility to your advantage.<\/p>\n

The key is not to play along with the crowd. Because the crowd is rigged by vested interests. It\u2019s a game they\u2019re playing, using their rules\u2026 and your money!<\/p>\n

 <\/p>\n

If you can\u2019t get the same deal, get a better deal<\/strong><\/div>\n

 <\/p>\n

A perfect example is Warren Buffett\u2019s deal to buy part of Bank of America [NYSE: BAC]<\/strong>. When the news was announced, investors loved it. They bought Bank of America shares on the news. The share price rallied 20%\u2026 \u201cWell, if Warren\u2019s buying, it must be good.\u201d<\/em><\/p>\n

But it isn\u2019t. Warren\u2019s getting his own deal. In fact, under the structure, it\u2019s actually bad news for other Bank of America investors because he gets an almost guaranteed 6% dividend yield while ordinary shareholders get an unguaranteed 0.55% yield.<\/p>\n

Warren is playing for the other side. He\u2019s not playing on the same team as you. That means you shouldn\u2019t do what he does, you should do the opposite to what he does!<\/p>\n

For a start, it means buying gold, holding cash for a 5% or 6% compounded return and then using just 10-20% of your savings on strategic investments.<\/p>\n

How so? Let us explain\u2026<\/p>\n

We\u2019re not saying shares are a bad investment \u2013 that would be strange for a publisher of financial newsletters. But you\u2019ve got to be smart with investing. You\u2019ve got to understand how the market is rigged against you, and what you can do about it.<\/p>\n

The best way to handle it is to through Risk, Volatility and Leverage:<\/p>\n

    \n
  1. Leverage:<\/strong> This is where you try to bet pennies to make pounds. Stick a few small-cap stocks in your portfolio that are leveraged to market events. My old pal, Diggers & Drillers<\/em> editor, Dr. Alex Cowie has done this with a bunch of gold and silver stocks. Don\u2019t invest your life savings in these stocks. They\u2019re risky. But with gold edging higher, small-cap gold plays should out-gain physical gold at some point. And that makes them worth it. But small-caps aren\u2019t just about growth. If you\u2019re conservative, there are a number of profitable small-cap stocks that offer growth and<\/span> better-than-the-bank dividends. Again, you can make a small investment in them and get a good yield, plus growth<\/em>.<\/li>\n
  2. Volatility:<\/strong> Trade stocks. It sounds hard, but it doesn\u2019t have to be. You can start off small and these days with the market volatility you can even make good returns trading blue-chip stocks. Just ask our Slipstream Trader<\/em>, Murray Dawes. This morning he sent out a take-profit alert on two stocks he short-sold last Friday. Of course, be careful. Trading isn\u2019t for everyone. And if you don\u2019t have the time to do your own research, you either need to make time or pay someone to do it for you. You can check out Murray\u2019s latest free video update here<\/a><\/li>\n
  3. Risk:<\/strong> Buy no more than a handful of reliable blue-chip stocks that pay a regular dividend. These should be \u201cbottom drawer\u201d stocks. That means, stocks you\u2019re prepared to hold on to through thick and thin\u2026 simply because you\u2019ve only got a small part of your wealth invested in them. If the blue-chip stocks you\u2019ve picked are really good you should think about taking part in the dividend reinvestment plans so you can compound your returns. But you should only do this if you don\u2019t need the cash income from dividends.<\/li>\n<\/ol>\n

    Now. Don\u2019t ask us how much you should invest in each area. That\u2019s up to you. The most important thing is to do what\u2019s comfortable. If you\u2019re not comfortable trading, then don\u2019t do it \u2013 it\u2019s not the end of the world if you don\u2019t.<\/p>\n

    But it may mean increasing your exposure to small-cap stocks, or putting a bit more into stocks that pay a dividend \u2013 or any other way of giving your returns a little boost.<\/p>\n

    But whatever you do just remember that when central bankers, politicians and mainstream advisors tell you something has to be done to save the economy, what they\u2019re really saying is, \u201cThis is what needs to be done to save our own necks, and you \u2013 the taxpayer \u2013 have to pay for it.\u201d<\/em><\/p>\n

    Don\u2019t fall for it.<\/p>\n

    Cheers.
    \nKris<\/strong><\/p>\n

    Three Steps to Wealth: Leverage, Volatility and Risk<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

    A perfect example is Warren Buffett\u2019s deal to buy part of Bank of America [NYSE: BAC]. When the news was announced, investors loved it. They bought Bank of America shares on the news. The share price rallied 20%\u2026<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-23650","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts\/23650","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/comments?post=23650"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts\/23650\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/media?parent=23650"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/categories?post=23650"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/tags?post=23650"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}