If you are into team sports, you know that a great team requires a diverse range of talents and skills to be successful.
Let us consider football (i.e. Australian Rules). A team will have quick-paced wingers (or half-backs) who are able to move the ball quickly down the field, turning defense into attack. Then there are the taller types who can take strong overhead marks, or the mid-fielders who can run all day and have 30-plus possessions. Finally, there are the forwards who can (usually) kick goals.
Experience counts, so there will be those veterans who have guided the team and stay calm under pressure. Then there are the “rookies” that provide enthusiasm and are highly motivated to play well each week, knowing their spots are at risk. However, we also know those younger players will take time to develop into their full potential.
In a portfolio sense, you also want diversity. Funds (or investments) have different strengths that they provide to a portfolio. Bonds, for example, provide lower volatility than shares and can be a source of return when equities are considered “risky”. Direct property can provide steady income with a reduced level of price risk, but have liquidity risk (i.e. not easy to turn to cash).
Also, much like a team, all portfolio constituents will rarely all behave well. They go through periods when they are out of favour. There can be many reasons. For example (see chart below), emerging markets have underperformed developed markets since late 2010.
It should also be highlighted that if all portfolio investments are performing well, it may only signify that they are in a currently “favoured” sector and should the environment change, the portfolio will suffer.
We review all portfolio constituents regularly, to ensure the mix remains appropriate. Through experience, we know that sometimes, conditions are not favourable for all and during these periods we will assess investments against the prevailing environment and it may not be time to “drop” them, but rather wait for the “conditions” to change. These difficult periods may also be the exact time you should be adding them to your portfolio.
Our review process allows us to rest assured, knowing that our portfolio has the “team members” to get us through the “season”, even if during some games (i.e. the short term) some players are not meeting our desired objective.
Teams work best when they have the right mix of skill-sets, youth and experience. It is the same for a portfolio. In the same way, portfolios work best when they have the correct balance of asset classes, sectors, managers and investments (for a chosen risk profile).
Preda Wealth – Aug 2019
Concepts discussed herein are of a general nature. You should not act on the material provided without obtaining advice specific to your own needs, objectives and circumstances