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 person is a fool if they think they 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 a financial storm.
Investment principles
The foundations of a strong portfolio rely on four key ‘pillars’ or investment principles… quality, value, diversity and time.
We are all probably tired of hearing 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 factors are equally important. Forget about just one and you are setting yourself up for failure.
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 should 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. But you must always remember that investing in the share market is 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 very long time, that they are continually growing – not going out of business.
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 highly performing sectors, 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 should be designed to cope with the occasional bouts of volatility.
And finally, the pillar of time applies to the previous three. It can give you the best chance of success. Every market will suffer periodic downturns, however over time the upturns generally triumph. The golden rule is to not panic, don’t get caught up in the fear and greed cycle. Take some time to learn about market downturns, so that you can use them to your advantage and lay quality foundations for your share portfolio.
Intrinsic Private Wealth specialise in providing financial advice to Australian investors. With over 20 years of experience in the finance & investment industry.
General Advice Disclaimer: Information is of a general nature only and has been provided without taking account of your objectives, financial situation or needs. Because of this, you should consider whether the information is appropriate in light of your particular objectives, financial situation and needs. Intrinsic Private Wealth has financial advisers that are authorised to provide personal financial advice. Call 02 9615 4500 for more information on our available services.