Text II. Sound Investing During Market Volatility

Recent increases in the volatility of the financial markets have many investors thinking about their portfolios and wondering if they should make changes.

This is therefore an excellent time to discuss the importance of maintaining a disciplined approach to diversified investing.

Here are four key points to keep in mind about disciplined, diversified investing during periods of market volatility:

1) Diversification is a tool designed to reduce risk. In the financial markets risk and reward go together. Higher reward investments tend to carry greater risk. Although all investors would like nothing better than a high reward investment that carries low risk, it is important to remember how rare that is. When one diversifies one's portfolio, it is to reduce risk. We do not diversify in order to maximize reward, rather we diversify in order to reduce risk and portfolio volatility.

2) If one's portfolio is properly diversified, then one need not carry around a great deal of anxiety about the daily ups and downs of the market. With reduced volatility that proper diversification brings, one need not become either exutant in an up market nor dejected in a down market. Instead one maintains a centered, approach to long term investing - not overreacting to market volatility.

3) Asset allocation and diversification is best done by calendar rather than by reactivity to market conditions. One of the biggest traps for investors is to get excited and buy when markets are rising (thereby buying high) and to get scared and sell when markets are falling (thereby selling low). The best way to avoid this is to review one's asset allocation at a regularly scheduled account review.

4) One of the best ways to build wealth is to take a longer time horizon to your investments. Sound investments, held over a long time horizon is the approach that we find works best. As Warren Buffet has said "in the short term the stock market is a voting machine, in the long term it is a weighing machine." In a short time horizon, emotions and group psychology rule the ups and downs of the markets. In the long term, the fundamental value of sound investments will rule the day.

Investors may well be in a better position to ride out the short term volatility we see in today's markets by maintaining the discipline of diversified asset allocation with a longer time horizon.

VI. Answer the following questions:

1. Is diversification a tool designed to reduce risk?

2. We do not diversify in order to maximize reward, rather we diversify in order to reduce risk and portfolio volatility, do we?

3. Should we carry around a great deal of anxiety about the daily ups and downs of the market if the portfolio is properly diversified?

4. Is asset allocation and diversification best done by calendar rather than by reactivity to market conditions?

5. What is one of the best ways to build wealth?

6. Do emotions and group psychology rule the ups and downs of the markets in a short time horizon?

VII. Match the words from the text with their definitions.

1) volatile	a) anything valuable or useful
2) diversification	b) a performer
3) scare	c) liable to sudden, unpredictable, or explosive change
4) asset	d) anything resembling a trap or prison
5) sound	e) to have a depressing effect on; dispirit; dishearten
6) executant	f) the practice of varying products, operations, etc., in order to spread risk, expand, exploit spare capacity
7) trap	g) concerned with, or having a reactance
8) deject	h) a system of dividing overhead expenses between the various departments of a business
9) reactive	i) to fill or be filled with fear or alarm
10) allocation	j) financially safe or stable

VIII. Continue the list of synonyms with the words from the text:

1. preserve, keep, retain, continue,…

2. be inclined, lean, be apt, prefer,…

3. infrequent, scarce, occasional, limited,…

4. vary, modify, alter, branch out,…

5. concern, apprehension,, fear, agitation,…

6. trick, ploy, snare, set-up,…

7. tactic, method, strategy, technique,…

8. responsiveness, sensitiveness, susceptibility, vulnerability,…

Listening

I. Listen to the recording. You'll hear Dominique Harold answering the questions concerning British Telecom’s privatisation. Listen to his replies and then give your personal point of view concerning the problem

II. Listen again and answer the following questions:

1. What is the necessity of the privatisation?

2. How profitable does the process promise to be?

Speaking

Speak out:

a) Discuss the following questions with your partner(s).

1. What are the advantages and disadvantages of stocks and bonds as a form of investment?

2. What opportunities do control stocks give to their holders? Who can become holders of control stocks in our country?

3. What do you think are the reasons why individuals choose to invest their money in government securities?

4. Do you share the point of view that municipal bonds are the most reliable ones? Give your reasons.

5. What are the risk factors of investing?

6. What branches of our industry need investing?

b) Read the following description of the situation with financial instruments and suggest your own solution to this problem:

Having invested 1 000 000 rub. into one of the mutual funds, a client started receiving regular monthly profit till the situation on the stock market worsened. The price of assets decreased significantly and the client tried to save the rest of his assets. How do you think can buying of bonds and diversification of portfolio improve the situation or more radical means are essential?

Writing

Your friend has $500.000 capital he wants to invest. He asked you to go to a brokerage firm and have a full interview with him. Ask every question you can. Think about the firm's experience and procedures, the individual broker's experience and the ability of both of them to meet your needs, preferences and objectives, references and reputation on the market. Write a letter summarising the results of your interview.

Unit 8