Stock tips make for enticing cocktail party chatter. No doubt you’ve heard someone’s braggadocio at a party, “Yeah I nailed a 4-bagger on that one.” Translation: I picked a stock and it did well. And you didn’t.” Beware: You’ll rarely hear the other side of that story: “I went all-in on TechCom and lost it all.”
Interestingly, women are less prone to this type of social behaviour. Research shows women are more likely to pursue a balanced and well thought out investment program and to stick with it. Bravo ladies: This is the key to investing success. Exciting, no. Satisfying, yes – knowing your investments are on track to get you where you’re going.
So, what’s your pleasure? Shaken or stirred? Your portfolio’s asset allocation is not so different from your favourite cocktail. You know how strong you like it and this preference isn’t likely to change in the short-term, although it might over time. You know the experience you can expect and how it will make you feel. And while it’s interesting to sample new ingredients from time to time, in the end it’s the recipe that matters.
Studies demonstrate that when it comes to investing, more than 91% of the return difference between my portfolio and yours comes from the asset allocation recipe used to build the portfolio. For example, if I have half my money invested in the stock market and you have none, my return experience will be very different than yours. Will it be better? We don’t know. In the short-term we only know that it will be more uncertain (aka risky). We also know that historically, uncertainty has been rewarded with better returns over the longer term – something known as the risk premium. We also expect that this will be the case going forward, if we are patient enough. If we are going to imbibe, therefore, we had better understand the risks up front and make sure we schedule enough time for recovery.
Want another? Despite what I hear in the hot-tub in Florida, the choice of which stock to buy doesn’t matter that much. In a study of 82 large pension funds over a decade, less than 3% of the difference in portfolio returns was attributable to security selection. So, forget about worrying whether to buy bank stock A or B, or tech stock C or D. Focus your attention on getting your asset mix right and choose an advisor who does the same.
The perfect portfolio cocktail combines ordinary ingredients into something that surpasses the sum of its parts. Our weighting in stocks gives us the boost we need. Bonds are the mixer. A float of cash keeps things liquid and palatable. To add spice, a splash of something more volatile might be interesting, but not necessary. Alternatives like real estate mix well with other investments but may not be suitable for all investors.
You may need to experiment a little to find the right asset mix for your risk tolerance. If equities are part of your portfolio, your first shot of volatility might make you feel sick. Tolerance usually builds with experience but may also decline as you age. Some have stronger stomachs than others and can assume more equity exposure. Some people need income from their portfolio, while others just want to keep their capital safe.
Think of your portfolio manager or investment advisor as a professional mixologist (or barista if you are tiring of the cocktail analogy). Their job is not only to recommend the perfect beverage for you but also to make sure it is mixed properly. Are the chosen investments doing what they are supposed to do? Is the balance right? Too strong? More ice?
What, you want something else? If you’re tempted to pitch the whole thing and try something else, your investment advisor should be asking you why. Maybe the cocktail your friends are drinking looks more enticing right now, but is it right for you? Is it the best thing for them?
Yes sir, I’ll have another. With the longest bull-market in history making media headlines daily, some investors are tempted to top-up or go for something stronger. More of a good thing is not necessarily a good thing, although it might seem like a good idea at the time.
Are you thinking clearly? The middle of a market correction or personal crisis is not the right time to go on a binge or go on the wagon. Stick with the program that works for you. Get professional help, if necessary, and remember that exercising moderation in all facets of life is usually pretty good advice – including when it comes to your portfolio.
