Keeping your portfolio on track for the long term

Investors are worried about rising interest rates, and yet rates are lower than at year-end 2013. People fret that shares are overvalued, and yet the Australian and global market indices are up for 2014, despite the recent turmoil.

We are, alas, constantly blindsided by the markets. We don’t know what economic and political developments will hit us next. We can’t be sure how other investors will react to these developments. And — let’s be honest — our own thinking is often less than rational.

How can you keep your portfolio management on track amid all the market turbulence? Try asking yourself these three questions.

1. What information or insights do I have, that others don’t, that make me think I can outsmart the market?

There are two ways to beat the market. First, you can uncover information that isn’t broadly known by investors. This is tough to do, unless you’re trading on insider information, which is illegal.

Second, you could do a better job than other investors of analysing public information. You might conclude, for instance, that U.S. economic growth will be slower than most people anticipate or that other investors are overly glum about the prospects for emerging-market stocks.

But what are the odds that you’ll be right? The markets are dominated by professional investors who are better trained, better informed and more experienced than you and me. We’re highly unlikely to outguess them.

2. What can I confidently say about investing?

If we load up on a particular stock or market sector, it’s pretty much like flipping a coin. Maybe we’ll call heads correctly — or maybe not. There’s scant reason to be confident in our ability to pick winning investments. So what can we be confident about? For the thoughtful investor, there are some unexciting but useful truths.

Among them: Diversifying broadly reduces the chance that we’ll be badly hurt by any one investment, while improving the odds that we’ll make money over the long run. Most active managers lag behind index funds, which simply seek to replicate the performance of the market averages. Regular rebalancing keeps our portfolio’s risk level under control.

Other truths: Cutting investment costs helps us keep more of whatever we make. Holding down our portfolio’s tax bill, whether by funding superannuation accounts or favouring tax-efficient investments in our taxable account, can also leave us with more money in our pockets.

Dull stuff? No doubt. But investing shouldn’t be confused with entertainment. When we invest, the goal isn’t to beat the market, get our pulse racing or prove how clever we are. Rather, the goal is to accumulate enough for important goals like financial independence and your children’s education.

If you can’t focus solely on these goals — and want a little entertainment from your investments — consider setting up a separate “fun money” account. You might trade with 5% of your portfolio, while leaving 95% in a diversified mix of low-cost index funds.

3. If I were starting today from scratch, would I buy the portfolio I currently own?

It could be that your portfolio isn’t quite what you want because you’re constrained by unrealized capital gains. Perhaps you bought a stock in your own name that had great returns, but its performance has since fallen off. Still, you might be reluctant to sell until you’re in a lower tax bracket or perhaps you hope to bequeath the shares. At that point, your heirs would be free to sell because of the step-up in cost basis that occurs upon death.

But often, it isn’t taxes that stop us from fixing our portfolio, but rather some mental mistake. Maybe we’re loath to sell some holdings because they’re underwater, and we want to get even before we get out. Maybe we inherited the investments from our parents and we’re reluctant to sell because we think they’d disapprove. Maybe we persist in trying to beat the market because we remember our winners while conveniently forgetting our losers. Maybe it simply feels safer to sit tight, because change feels risky.

Whatever the reason, you might talk about your portfolio with your spouse, a friend or a colleague. Articulating your reasons for sitting tight may be enough to make you realize you ought to change.

Don’t like the idea of discussing your finances with others? Here’s an alternative: Imagine you’re advising your neighbors, who are the same age and in a similar financial situation. What portfolio would you advise them to buy? That’s probably the portfolio you ought to own.

The Calibre Private Wealth Advisers investment philosophy for portfolio management

In our experience, people often struggle to separate their emotions from their investment decisions. Hence they often follow a reactive cycle of excessive optimism and fear which can lead to poor decisions at the worst times. In addition, many of the investment solutions we see in the market simply do not deliver consistent alpha (i.e. returns above the benchmark net of all fees).

Given this compelling evidence, we offer a high quality investment solution that is transparent and based on academic research. Over the long term we have achieved consistently strong results whilst using strategies to protect client portfolios against volatile markets.

Our evidence-based approach is:

1. Broadly diversified, tax efficient and low cost – our investment approach typically costs between 0.30% to 0.50% per annum to implement and is not available to the general public.
2. A disciplined and structured approach so that we are not guessing with your money.
3. Founded in academic research to gain every edge we can in volatile markets.
4. The best way to protect and grow your wealth so you have the highest chance of achieving your goals.