Can Low Volatility and Low Liquidity Prevent Illogical Investing Behaviour?

Investing

This article tells a story about the psychology of investing and examines the hypothesis that investments with low volatility and low liquidity may prevent irrational investment behaviour which in turn may provide higher overall investment returns.

Firstly, a few quick definitions

Volatility is generally referred to as price swings or movements in value of an investment asset. For example, when the stock market rises and falls more than one percent over a sustained period, it is called a ‘volatile’ market.

Liquidity refers to how easily assets can be converted into cash.  For example, your savings account is liquid, but if you owned land and needed to sell it, it may take weeks or months to liquidate it, making it less liquid.

Buy low/sell high

Logically, any investor knows that is better to buy an asset for a low price and sell for a high price, hence the term ‘buy low and sell high’.

However, because we are human beings with emotions, we do not always invest logically.

We can end up doing the opposite of what is logical – and end up buying high and selling low.

By way of example, let’s look at investment inflows or ‘buys’ into the stock market.

Most investment inflows or ‘buys’ occur when stock markets are buoyant, and prices are generally high.

By comparison, most investment outflows or ‘sales’ occur in low or poor performing stock markets when prices are generally considered low.

It is not within the scope of this article to discuss why we as humans behave in this manner.

However, I am pretty sure that emotions such as ‘fear of missing out’, herd mentality, etc play a role in our illogical investing behaviour.

Let’s look at illiquid and low volatile unlisted property funds

Unlisted property funds tend to have a lower price volatility than listed property funds.

This means that their value does not go up as much in a buoyant market and similarly their value does not go down as much in a flat or falling market.

Because unlisted property funds do not go up in price as much as listed investments, they do not tend to have as large a quantum of money investing at full or high prices when compared to listed property funds.

The lower volatility in unlisted property funds reduces the ability for investors to act illogically and ‘buy high’.

Further, due to their illiquid nature, unlisted property funds tend to have ‘gated’ or ‘limited’ liquidity capacity.

This limited liquidity restricts the ability for investors to act illogically and ‘sell low’ when markets are flat or falling.

Conclusion

We are not saying that unlisted property funds are the panacea to your investment woes, however it may be worthwhile considering a good quality unlisted property fund for your investment portfolio.

Disclaimer Information contained within this document does not constitute financial advice, nor is it a personal recommendation. Capital Property Funds is not authorised or qualified to provide financial advice or to make an investment recommendation.

Information contained within this document is general in nature and has been prepared without regard to the individual objectives, financial situation, or requirements of any person.

This document is not an offer to invest.  Applications can only be made by completing an application form attached to the relevant fund offer documents.

Prospective investors should seek personal financial and legal advice before deciding to invest.

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