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Monday, 18 May 2020

Podcast Episode #6: Total Money Management

Total money management

Tune into Episode #6 of our podcast series here, where we discuss our '3 Wells of Wealth' model for total money management across three different timeframes (or click on the image below):

You can also tune in at Soundcloud, Stitcher, or Spotify.

Don't forget to leave us a friendly online review to help us get the word out 😀

You can listen back to Episodes 1 to 5 here.

Well 1 strategy note

When you're observing in real time it often appears that markets follow a 'random walk', but since markets are driven by human behaviour this is not the case.

Returns tend to be higher at certain times of year, and lower at others, by way of one such example. 

And, as we've seen recently, when markets experience sharp drawdowns volatility tends to spike through the roof, since naturally enough people tend to get scared. 

Back-tested research shows that one clear-cut way to deliver significant outperformance in markets is to use leveraged products, and this is true even over the long run (i.e. there's no natural decay over time). 

The problem or challenge with using systematic leverage over the long run is that the periods of volatility can be scary and harmful to returns.

Furthermore, not many of us have the stomach for the big swings in the portfolio that using leverage entails, especially when the swing is down (a cognitive bias known as loss aversion).

Therefore if you're adopting such an approach you'll likely need to use signals to protect your downside by rotating into cash or bonds during periods of volatility. 

Using moving averages is one proven way to help to mitigate the potential for loss aversion. 

Critically, being out of the market during periods of volatility helps investors using leverage to sidestep the very large down days which invariably occur during periods of heightened volatility. 

A fund managing billions of dollars won't easily be able to pull this off, but an individual can use a simple rebalancing strategy with a diversified product in order to outperform. 

A personal blog page isn't an appropriate place for discussing the finer details of using leverage in markets, of course, but you do your own research easily enough on this one.