By MoneyMorning.com.au
This morning we’re following on from yesterday. We promised to show how you can set your portfolio to make gains… whichever way the market goes.
It’s not fool-proof. But it will help you limit losses from extreme events… and potentially profit.
More on that in a moment. First…
This chart shows the S&P/ASX 200 Consumer Staples Index. It’s an index of ‘safe stocks’. Stocks you’d call safe and dependable – supermarkets, food companies, etc.:
But “safe and dependable” didn’t stop the index falling 33% from the 2007 peak to the 2009 low.
Investors who bought “safe” stocks took a hit to their wealth.
For instance, in June 2008 just as the market was about to fall off a cliff, the average Aussie investor had more than 50% of their investable assets in the stock market:
When stocks fell nearly 50%, those investors saw their wealth fall by a quarter!
And the war for Australia’s natural resources doesn’t help either.
The key to keeping and building your wealth is something our old pal Dan Denning has banged on about over at Australian Wealth Gameplan. It’s called asset allocation. Dan gets his inspiration from Harry Brown and what he calls a “Permanent Portfolio”.
Well, we’ve got our own spin on asset allocation. And we get our inspiration from… the racetrack!
Who are the only folks guaranteed to walk away from the racetrack with more money than they arrive with?
That’s right, the bookies win regardless of which horses win.
In short: Bookmakers don’t care who wins a race… so you shouldn’t care which of your investments does best.
That was one of our biggest takeaways from the Gold Symposium. The experts were determined that gold had to be the best investment. In fact, we’ll go further. They were convinced gold was the only investment to hold.
In our view that puts them in the same category as the housing spruikers who say, “Only invest in housing.” Or the share spruikers who say, “Shares have been the best performing asset for 100 years.”
All three investment strategies could potentially fail. And what if they do? That’s where we look to the winners on the racetrack.
Bookmakers always walk away from the track in profit because they don’t care who wins. They play the odds (in truth they make the odds, that’s why they always win).
Simply put: if punters back a horse heavily, the bookie will shorten the odds. At the same time the bookie will adjust the odds on other nags to attract punters.
All the time the bookie holds a position that ensures he or she will make a profit… whoever wins.
Of course, as an investor you don’t have the same advantage as a bookie. You can’t control the odds of winning. But you can shift them in your favour by moving your asset allocation around.
But make no mistake, this isn’t about diversification. Diversification is where you stick cash in a bunch of different investments and hope things balance out.
Asset allocation is different. It’s about managing your investments to benefit from specific market movements.
As we’ve suggested for some time, right now your biggest asset allocation should be in cash. Why? Because crazily enough, cash offers one of the best returns for the risk you take.
The point is, don’t wed yourself to one particular asset class.
Have a core holding in different assets. But if one asset looks set to do better than another, do as a bookie would and adjust your portfolio.
Remember, building wealth isn’t about obsessively backing one asset, like safe stocks and ignoring all others. It’s about moving the odds of success in your favour… by protecting what you’ve got and then building on it.
In fact, it’s pretty much how bookies clear up at the racetrack!
Cheers.
Kris.
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From the Archives…
The Onward March of the State
2011-11-11 – Kris Sayce
Lose a Shirt, But Gain a Wardrobe
2011-11-10 – Kris Sayce
Neither a Borrower Nor a Seller Be…
2011-11-09 – Kris Sayce
Roman or Zimbabwean
2011-11-08 – Kris Sayce
Lighting a Match to Inflation
2011-11-07 – Kris Sayce
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