One of the reasons I enjoy road racing so much is because there are distinct similarities between this sport and investing money. I’m sure many people will scoff at such an analogy, but there will be others nodding their heads in firm agreement.
Just like cycling, the right team in investing is crucial, and diversification is at the heart of success. In road races, a winning team is made up of riders with different skills sets, including time trialists, climbers, domestiques and sprinters. Likewise, in portfolio construction, it’s vital to have a combination of investment managers who perform well in different kinds of market conditions and who can deliver different benefits, such as capital growth, income or drawdown protection.
This means having a good mix of equities (both domestic and global), defensive assets such as bonds, and alternatives such as infrastructure and real estate that bring their own unique characteristics to the table. This is particularly pertinent at the moment, when we are seeing a rotation in markets that will require a different mix of investment skills and styles than we have seen in recent years.
The equity market rotation that has occurred this year away from high P/E and more growth-oriented stocks has been a strong reminder to investors on the importance of diversification – not only across asset classes, but within them.
This is not simply a matter of having three or four different equity managers within a diversified portfolio. It’s about ensuring these managers are of differing investment styles and approaches, and are not too highly correlated in the types of returns they provide.
The portfolios that will perform best over the long term are those that include managers and strategies that deliver during strong bull markets as well as those that are more favourable in protecting investors during the inevitable downturns.
The danger at present is that many investors have become used to macro market conditions that have seen little change for the best part of a decade, with low inflation and even lower interest rates very supportive of growth assets, including equity markets. But benign weather and good conditions never last forever. Savvy investors – and experienced riders – know that challenging climbs and treacherous conditions always lie ahead, and they prepare for that inevitability.
Another similarity is that in road racing, like investing, success is best measured over the longer term. Shooting the lights out on the first day may feel good, but at the end of weeks of racing – or decades of investing – that first day will have minimal impact on the final result. Rather, it takes time, good judgement, and patience to achieve the most important and worthwhile goals.
This also means it’s better to have a portfolio that performs well – even if it’s not number one – over many years, than one that performs exceptionally for one year but then has four or five bad years. Likewise in cycling, the serious contenders are more focused on being near the front for most of the stages, and ultimately winning the whole event, rather than winning a single stage and nothing else. In both cases, minimising downside risk can be just as important as maximising returns.
Finally, both cycling and investing require finding a balance between risk and return. In racing, aching muscles are part of the job and so are falls and crashes. The best riders seek to push themselves and take some risks, but at the same time, they try to make sure that they don’t get caught up in a crash or injure themselves, and knock themselves out of the race.
Investors must make similar judgement calls. There are no returns without risks, so investors must be prepared to put themselves and their capital on the line if they want to generate returns. Furthermore, a downturn in markets can be a scary situation for many investors, and they may need to grit their teeth and ride out the volatility.
But with the right team to support them, investors are more likely to find themselves celebrating long-term success and achieving their goals.
Stuart Fechner, head of research and asset consultant relationships, Bennelong Funds Management