Take a breath and re-focus on your investment objectives

The information in this article is market commentary only and reflects Lincoln's views and beliefs at the time of preparation, which are subject to change without notice. To obtain up-to-date information, please contact us.

As we fast approach the end of the Financial Year, many of us will be assessing the performance of our portfolio and evaluating the quality of our calls over the last 12 months. Unless you were in the ill-advised position of holding an overexposure in Telstra Corporation or AMP, chances are your share portfolio returns have been quite strong.

At the time of writing, the All Ordinaries Accumulation Index was up 10.7% to date this financial year and with little in the way of macro headwinds, the 2017-18 investing year will likely go down as a strong one.

Stock 12-month performance for Market equities

Index 12-month performance (May 2017-18)
ASX All Ordinaries (TR) + 10.79%
Dow Jones (TR) + 18.91%
MSCI World (TR) + 12.18%
Stock Doctor Star Growth Stocks (TR) + 27.96%


There is often a saying amongst fund managers that a crucial part of their role is to manage risk. But what does that mean? When most investors think about risk in the share market they gravitate to the obvious example of losing their money in a stock. However, the reality is that this is an impossible, non-achievable objective to avoid capital losses altogether.However, making money can create its own issues. Bull markets have a habit of making lazy investors, who when cycles change, have no means of protecting themselves. Further, the thirst for a ‘quick win’ can see investors take on more risk to capitalise on the positive momentum, straying outside their strategy and now see their portfolio misaligned with their objectives. While the bets may have paid off, how do we position ourselves to protect our position?

Therefore, we need to take a broader perspective on the issue and look at the concept of managing “Portfolio Risk” – the risks that the portfolio will not achieve the end objective of the entire portfolio.

To explain the concept of Portfolio Risk, let’s use the analogy of a football match to help explain the concept. Players have many different traits including height, weight, speed, strength and skill, with varying combinations of the above in one player. The coach starts with an objective (investment) to win the game and formulates a strategy to meet (invest) in that objective. To execute the strategy, the coach will then select the players (stocks), assessing all the traits and skill sets that are required to give the team the best chance of winning. And once the game begins, some players will perform their role flawlessly, others will be a little flat though continue to serve their purpose while others will not perform and will need to be substituted.

By the end of the match, the coach needs to assess all aspects of the game plan (investment strategy) and decisions (portfolio realignment) made in readiness for the next game. While one or two players may have excelled this week, to build a sustainable chance of winning (meeting the objective) each week, the coach knows changes are required to ensure that if the same players don’t perform, the rest of the team (stocks) can shoulder the load.

There is always an ongoing trade-off between risk and potential reward that needs to be carefully managed to ensure that a portfolio remains aligned with an investor’s objective over the long-term. When there are substantial periods of out or underperformance, there is a significant chance that the portfolio can become skewed in some way and it is reliant on the investor to get it back on track ready for what may come. While ‘making money’ makes sense as an objective, and this year has been relatively smooth, a flippant approach to portfolio construction with disregard to your capital invested means any possible positive outcome will continue to be more a game of chance, rather than because of proper planning.

In our view, the best way to position your portfolio to achieve your investment objective of either growth, income or both, is to have a defined strategy that allows you to proactively and with discipline, manage a naturally diversified portfolio of great fundamental businesses that aligns with your objective and risk tolerance. The focus is on the words “proactively” and “with discipline” because while the future is unknown, the best preparation is having your eyes wide open and being aligned today.

Published Tuesday, 12 June 2018
www.afr.com. | Financial Review

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