Winning Investment Strategies?

The football world cup starts on the 12^th of June, already the favourites to win are being discussed and debated everywhere. Hosts Brazil have a great chance, challengers Argentina are no pushovers either, Germany have the best all round players, Spain are former champions - these countries and more (like France, England and Italy) are tipped to win the cup. Ultimately the team that plays the best across the grueling tournament – having a judicious mix of attack and defense will lift the golden trophy.

Investing for a long term goal is no different from a football match. Let’s see how:

In football you have 11 players, each performing their own function. There are three sections into which a team is usually divided:

Defence

Comprising of a goalkeeper and defenders, their task is to ensure that the rival team doesn't sneak in and put a ball into the net. Going a goal down early in the game usually means an uphill task to win the match.

Debt/Liquid funds perform this task admirably in terms of providing a cushion for your investments against hard times. Without an adequate exposure to debt/liquid, your portfolio could face an uphill task to recover when the equity markets are down. Debt/Liquid funds tend to give steady returns which acts as a bulwark for the portfolio against the attack of falling markets.

Mid Field

The value of a strong mid field cannot be understated. The mid field is the most agile part of the team, mid fielders can attack, providing the forwards with the impetus of an attack, often producing the vital pass that leads to a goal. The mid fielder can also run back and defend, if necessary, taking the ball away from the attackers of the opposite team.

Gold can be one of the better mid fielder for your portfolio. Usually negatively correlated with equities (which means the price of gold moves up when equities are down) gold tends play the role of the defender to the portfolio; however gold has also given a annualized return of 16.4%¹ over the ten year period of from 31^st May, 2004 – 29^th May, 2014, adding to the ‘attacking’ capability of the portfolio, in other words the ability of the portfolio to beat inflation over the long term. CPI inflation from March 2004 to March 2014 has been at an average of ~7.8%² YoY. Gold has thus, given returns at a higher level as compared to CPI inflation. However as an investor you should know that past performance may or may not be sustainable in the future.

Attack

The players who have the most ‘glamorous’ role in the team are the attackers or forwards, whose responsibility is to score goals for their team and win the adulation of the crowd. The job of the forward is to keep pushing the opposition and providing that main thrust that will carry the ball past the opposition goalkeeper and into the back of the net.

Equities, with their ability to deliver the maximum returns with high risk while comparing equity, debt and gold are the forwards for your portfolio, there are times when the market has given average returns of more than 20%³ YoY in the 10 year period of 31^st May, 2004 to 31^st May, 2014. However in football parlance, there are times when the ‘defence’ is too strong and the markets crash as though poleaxed by a well-aimed tackle. Just like the temperament of the star forward, equity markets are volatile and could win the match for you and could also be equally responsible for the dip in your portfolio value. However as an investor you should know that past performance may or may not be sustainable in the future.

As an investor the key is to think like a manager of a football team. You need to have a sensible mix of defenders, mid fielders and forwards. Over reliance on defence may ensure that you do not get optimum returns – you may draw the match but not win, which might not be enough. Over reliance on attack could ensure goal after goal, but if the defence is weak then the opponent can match that, again leading to a draw and not victory. You need a perfect mix of attack and defence to win the match.

Coming back to investments, investors need to get their asset allocation between equity, debt and gold right. Too much reliance on equity could be detrimental for the portfolio when markets are down, too much debt could lead to even negative net returns if inflation levels are higher than the rates of interest. Hence we would encourage you to ensure that your portfolio has a prudent mix of equity, debt and gold, or investments in a multi asset fund, which takes care of this allocation for you. Please do consult your financial advisor before making any investments.

1 . Data Source: Bloomberg

2 . Data Source: labourbureau.nic.in; computed by Quantum AMC for CPI IW rates from March 2004 to March 2014

3 . Data Source: bseindia.com; computed by Quantum AMC for S&P BSE Sensex values

Above article is authored by Quantum.

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