Making better choices
is not always this easy

 

Newsletter Archive

Why You Need to Watch Out for The Butterfly Effect

Posted On: Saturday, December 3, 2022

Why You Need to Watch Out for The Butterfly Effect

Covid-19 has upended almost every aspect of our lives, and it continues to do so.  We all know now when we travel that there may be havoc at some airports, as the airlines are understaffed.

The markets, meanwhile, continue to be taken on a veritable rollercoaster ride. Scientists and researchers have long warned of the havoc that could be wreaked by a novel virus. But most of these predictions centred around health issues and very little thought was given to the potential economic and social fallout.

Covid-19 is a classic example of a “black swan event”. The term originates from an ancient belief that black swans did not exist…until they were discovered in the wild. A black swan event is one that catches you completely off guard but is fairly easy to understand with the benefit of hindsight.

Which brings us to the butterfly effect. It’s not nearly as dramatic as a black swan. But, in the world of personal finance, it can cause just as much chaos.

I’ve heard the term but what even is the butterfly effect?

The term originated from the work of American meteorologist Edward Lorenz, who asked, metaphorically, whether a tornado in Texas could be set off by the flap of a butterfly’s wings in Brazil. His example was meant to hammer home the fact that complex systems are incredibly unpredictable. His weather models showed that a tiny variance in the initial conditions could result in an entirely different end result.

In popular culture, however, the term has come to stand for the notion that what seems to be a minor action or event can have dramatic and wide-reaching consequences. So, using the popular definition of the term, here’s how the barely perceptible flap of far-off butterfly wings can affect your finances.

Expect the unexpected

Few could have predicted the events of 19 October 1987, a day we now refer to as Black Monday. A market crash that started in Hong Kong rapidly spread to Europe and the US, where the Dow Jones lost 22% of its value in a single day. Unlike many other crashes, Black Monday wasn’t the result of some major global event. Instead, a post-mortem revealed that the crash had been caused by errors in trading software which precipitated an avalanche of panic-selling.

While some might say we should have seen Covid-19 coming, Black Monday serves as a reminder that not even the brainiest boffin can predict the future with any degree of certainty. In fact, it’s pointless to even try...

Instead, you should focus on risk management through asset class and geographical diversification. Having investments in different asset classes is a great way of reducing risk in your portfolio. While investments from the same asset class are positively correlated (i.e. their values move in the same direction during investment cycles) investments from different asset classes can behave differently.

And this is before we’ve even got started on the benefits of geographic diversification – South Africa comprises just 1% of the global economy, so you’d be crazy to put all your investment eggs in this basket.

Take note of the little butterflies in your life

While there’s nothing you can do about some butterflies in Mexico or Mauritius, you’d be surprised how much control you have over other butterflies. Take, for example, seemingly minor everyday expenses like buying lunch from the gorgeous Italian deli near work instead of bringing a healthy homemade sandwich.

While we shouldn’t feel bad about spoiling ourselves every now and then, it’s important to keep tabs on your spending to make sure it doesn’t get out of hand. Taken together, all those piffling day-to-day splurges can add up to a massive capital loss in the long run. Especially when you factor in the compound interest you’d have earned from investing the money in a unit trust instead of a BLT!

Seek professional advice

When all’s said and done, the butterfly effect is a reminder to be careful and considered in our financial decision-making. This might mean responding to a market downturn by adopting a more conservative investment approach or trying to minimise small daily splurges which can add up over time.

The butterfly also underscores the importance of embracing lifelong learning. It’s never too late to learn about how the markets work, to understand the immense value of diversification, and to reflect on your own behaviour to make the little changes that will have a significant impact on your financial future.

Of course, this is much easier said than done. Which is why it’s a really good thing you’ve got a professional financial adviser in your corner. Our door is always open, contact us!

Please Register Below Or Login To Continue Reading.

Email
First Name
Last Name

2024

November 4 - Market Update: Reasons for SA Investors to Be Hopeful?
November 3 - Evolving Wealth Part 1: Gen Z, Trailblazers of the Digital Investment Era
November 2 - Why the Rand Shouldn’t Be Your Main Reason for Investing Offshore
November 1 - 6 Winning Strategies That Top Investors and Elite Endurance Athletes Share
October 4 - Market Update | US Election Is Too Close To Call, so Expect Market Volatility
October 3 - How Rand-Cost Averaging Could Help You
October 2 - From Vows to Verdicts: What Happens to Your Will After Divorce?
October 1 - With Gold at Record Highs, Should You be Investing?
September 4 - Market Update: Christmas in September if Rates Come Down as Expected
September 3 - Why You Should Keep Your Investment Strategy to Yourself
September 2 - Aligning Your “Wheel of Life” – A Beginner’s Guide
September 1 - The Big Question: Should You Buy a Home or Rent One?
August 4 - Market Update: Magnificent Seven Lose Their Magnificence in July
August 3 - Unsung Heroes of Insurance: Four Types That Could Save You Money
August 2 - Do You Recognise Yourself in Any of These Client Case Studies?
August 1 - Three Pot System 101: What You Need to Know Before 1 September
July 4 - Market Update: Financial Markets Welcome GNU 2.0 and New Cabinet
July 3 - Busting the Post-Retirement Jargon
July 2 - Safeguard Your Money: Look out for Phishing Scams
July 1 - Why the Marshmallow Effect Could Derail Your Retirement Plans
June 4 - Why Emotions and Investing Don’t Always Mix
June 3 - Demystifying Retirement Planning Lingo
June 2 - The Sandwich Generation: How Can You Deal with Family Always Asking You for Money?
June 1 - How the Elections May Impact Markets in the Months Ahead
May 4 - Market Update: Geopolitical and Economic Risks are on the Rise and Investors are Concerned
May 3 - Need to Know: Annualised Returns Versus Internal Rates of Return
May 2 - Investment Jargon 101: Your One-Stop Primer
May 1 - Do You and Your Partner Share the Same Money Values?
April 4 - Market Update : Will They, Won’t They? The Case for Lower Interest Rates Improved in March.
April 3 - Unpacking Diversification: What Really Counts?
April 2 - Zen and the Art of Financial Planning
April 1 - The Secret to Solving the Financial Rubik’s Cube? Consistency.
March 4 - Market Update: Initial Investor Vote of Confidence Dissipates in Wake of Budget
March 3 - The Most Important Part of a Financial Plan: Room for Error
March 2 - Diversification: Free Lunch or Fool’s Gold?
March 1 - Budget 2024: What it means for you
February 5 - Budget 2024: The Minister of Finance Wants to Hear from You!
February 4 - Market Update: US and SA Markets Diverge on Differing Investor Sentiment
February 3 - Tax Tip: Must-Do Top Ups in February
February 2 - Should Investing Be This Sexy?
February 1 - Is There Really Much Difference Between Investing and Gambling?
January 4 - Market Update: What Lies Ahead for 2024?
January 3 - Think You’re a Rational Investor? Think Again
January 2 - Did 2017 Change the Way You Invest?
January 1 - How to Avoid Getting Burnt by the Next Investment Bubble in 2024

2023

December 4 - Stock Markets Break Three-Month Losing Streak
December 3 - The Differences Between Life and Living Annuities
December 2 - Should you be an Optimist or a Pessimist With Your Money?
December 1 - How to Give Meaningful Gifts This Festive Season
November 4 - Market Update: The Effects of War, Higher Interest Rates and China on Equities
November 3 - Why do People Invest in Property?
November 2 - Retirement Planning: The ins and Outs of Nominating Beneficiaries
November 1 - Retiring Well is About More Than Money
October 4 - Why Your Marital Contract Really Matters
October 3 - How to Avoid Being Scammed by Email Fraudsters
October 2 - The Stock Market Indices to Watch When Monitoring Equity Performance
October 1 - Why do Some People Have a Problem Spending Money?
September 4 - The Difference Between Being Rich and Being Wealthy
September 3 - The Ins and Outs of Buying Offshore Property
September 2 - A Good Budget Doesn’t Limit Spending, it Prioritises it
September 1 - Should you pay off your home loan?
August 4 - How to Take Advantage of the Donations Tax Allowance
August 3 - Five Reasons why a Financial Windfall Must be Managed Carefully
August 2 - What’s Cooking with the Three-Pot System?
August 1 - Make Sure Your Family is Financially Prepared for When You Pass Away
July 4 - A Must-Have for Couples who Choose not to Tie the Knot
July 3 - Can Gratitude Make you Feel Better About Your Money?
July 2 - Four Ways to Make the Most of Retirement
July 1 - How to Invest When There’s So Much Bad News
June 4 - The Ins and Outs of Compulsory Annuities
June 3 - Who is Influencing Your Financial Decisions?
June 2 - R is for Rebalancing
June 1 - Don’t let Money Ruin Your Relationship
May 4 - Five Ways to Teach Kids About Money
May 3 - Much Ado About Risk
May 2 - Living Wills: A Must Have, Despite the Grey Areas
May 1 - What is True Wealth?
April 4 - How the 2023 Budget Will Impact Your Pocket
April 3 - Three Financial Imperatives for Women in Divorce
April 2 - Should You Ask ChatGPT for Financial Advice?
April 1 - Compound Interest: The Eighth Wonder of the World
March 4 - How a ‘Safe’ Fixed Deposit Might Still be Risky
March 3 - Thinking of moving to Australia? Bear these numbers in mind
March 2 - Avoid These 6 Barriers to Wealth Creation
March 1 - How Good do You Think You Are at Investing?
February 4 - Is Money Stress Taking a Toll on You?
February 3 - Why an Endowment is One of the Best Ways to Invest Offshore
February 2 - Why too Much of a Good Thing Can be a Bad Thing
February 1 - Invest With FIRE and Never Look Back
January 4 - Why Lottery Winners End up Broke: The Importance of Your Financial Context
January 3 - Discover the Freedom of a Tidy Portfolio
January 2 - Why You Absolutely Should be Investing in Education
January 1 - Four Simple Steps to Start the Year on the Right Financial Foot

2022

December 4 - What is This Volatility Risk People are Always Talking About?
December 3 - Why You Need to Watch Out for The Butterfly Effect
December 2 - 6 Ways to Achieve Financial Freedom
December 1 - Three Books for the Holidays
November 4 - The Question of Loyalty
November 3 - Why do we Even Have Bull and Bear Markets?
November 2 - Should I Buy a Holiday House?
November 1 - Put Stocks, Rather Than Socks, Under the Tree This Christmas
October 4 - Can You Take Out Life Insurance on Someone Else?
October 3 - Loss Aversion and Lifestyle Creep – How Behaviour Influences Saving
October 2 - Why Timing Might be Everything in Retirement – Especially in a Bear Market
October 1 - Get Rich - Stay Rich Eight Mistakes Wealthy People Never Make
September 4 - Capital Gains Tax: 10 Common Questions Answered
September 3 - The Risk That Many Investors Don’t Think About
September 2 - Much Ado About Regulation 28 and the Private Investor
September 1 - The “Two Bucket” Retirement Savings System: What is it and Why is it Important?
August 4 - Retirement Planning for Age-Gap Couples
August 3 - A Simple “50-15-5” Budget Hack for Women (and Men!)
August 2 - Does Your Family Need a Constitution?
August 1 - Women’s Month: Three Ways You Can Improve Your Money Health
July 4 - Five Things to Check When a Loved One Passes Away
July 3 - Rules of Financial Planning For a Special-Needs Child
July 2 - Why Your Financial Plan Should Cater For Possible Dementia
July 1 - Why Inflation is the Most Important Investment Benchmark
June 4 - How Relevant Is The 4% Rule of Thumb These Days?
June 3 - Why You Should Treat Your Finances Like Your Health
June 2 - Is Your Business Good Retirement Capital?
June 1 - With the Limits Raised, How Much Should You Invest Offshore?
May 5 - Quote of the Month: Challenging the Rejection of an Insurance Claim
May 4 - Financial Products: The Less You Understand, the More You Pay
May 3 - The Miracle of Investment Debit Orders
May 2 - Five Things to Think About as Interest Rates Rise
May 1 - Stay Calm When the Bear Prowls
April 5 - Quotes of the Month – The War in Ukraine
April 4 - Smart Ways to Give: During and After Your Lifetime
April 3 - Take These Three Steps to Break the Money Shame Spiral
April 2 - When Things Don’t Go According To (The Financial) Plan
April 1 - What Amazon and Ford Can Tell Us About Diversification
March 4 - Quotes of the month – What the NFT?
March 3 - How to Avoid Losing Your Life’s Savings to a “Tinder Swindler”
March 2 - The Different Ways to Invest: What Does It All Mean?
March 1 - Three Reasons You Shouldn’t Wait to Talk to Your Kids About Money
February 6 - Quote of the Month – Don’t Cash In Your Retirement Savings
February 5 - Should You Top Up Your Retirement Annuities Now?
February 4 - Don’t Let Delays in the Master’s Office Leave Your Family in Financial Distress
February 3 - Don’t Let Delays in the Master’s Office Leave Your Family in Financial Distress
February 2 - Three Reasons an Insurer Could Cancel Your Policy
February 1 - Investing: Men and Women See Things Differently
January 4 - Quote of the month – Stay invested!
January 3 - What SARS Says About Crypto Assets and Tax
January 2 - Three Ways to Leave a Legacy, And Not Just an Estate
January 1 - Red-Carding the Myth of The Rational Investor