Establishing an investment portfolio can be likened to building a home. The most destructive, yet unpredictable predator to the structure of a home is the weather. Even in these most technically advanced days, we are still unable to accurately predict the weather.
And so too, a man is a fool if he thinks he can successfully predict the future of the global economy. Like the weather it can be the most unpredictable and destructive threat to your investment earnings. But with a carefully built portfolio based on sound foundations, you have a much better chance of weathering any financial storm.
The foundations of a strong portfolio rely on four key ‘pillars’ or investment principles… quality, value, diversity and time.
We are probably all tiring of the old line, “don’t put all your eggs into one basket” – meaning to diversify your portfolio – but that is only one pillar on which to rely. The other three are equally important. Forget about just one and you are setting yourself up for a very bumpy ride!
Let us briefly explain why all four pillars are crucial to your investing success…
If we look at the first two pillars, quality and value, it’s obvious this means to look for assets that are expected to provide
higher returns relative to their risks. Applying this to shares, quality companies will have a sound basis to their operations and growth; that is, their earnings are not driven by fads. This however, might mean they take time to deliver. Remember that investing in the share market is generally a long-term strategy.
Quality and value don’t always go hand in hand. Quality stocks may trade at such high prices that they offer low initial value or it could be that expectations for these companies are sometimes too high. The key here is quality… the expectation is that they will be around for a long time, not just a good time.
This takes us back to diversity. Diversity acts like the scales in a portfolio, providing balance. True diversity in a portfolio gives the investor the opportunity to take advantage of “hot stocks” or asset classes, whilst balancing out the risk with quality stocks and asset classes. It can provide a buffer against mistakes in assessing value because nobody gets it right all of the time. A well-balanced portfolio can cope with occasional losses.
And finally, one of the most important pillars is time because it applies to all three, giving you the best chance of success. Every market will suffer periodic downturns, however over time the upturn will always triumph. The golden rule is don’t panic and refrain from getting caught up in the fear and greed cycle.
For more information or to speak to one of our Financial Advisers please contact TNR Wealth Management on 02 6621 8544.
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