Discover the investor you really are By N e a l K e l ly
Do you know the type of investor you really are? Don’t answer that question too fast because with a bit of careful thought you might find out that you’re not the investor you think you are. Perhaps you’ve always thought of yourself as a very careful and safe player in the investment markets. Over the years you’ve invested in a little bit of property, opted for blue-chip stocks and funds, find yourself partial to government and corporate bonds and always have a steady amount of cash in term deposit plans.
den downturn in the fortunes of a particular asset, sector or territory - especially important given the market turbulence of the last two years.
On the other hand you might see yourself as an ambitious risk taker who is willing to stick your neck out in order to reap potentially bigger rewards. Your investment portfolio has included a sizeable property allocation, a big slice of shares in emerging markets and growth industries and only small portions of bonds and cash.
Simply put, correlation is the relationship between the performance of the different assets in your investment portfolio. Highly correlated assets tend to perform similarly - their ups and downs are in tandem, while highly uncorrelated assets tend to perform differently - their ups and downs occur at different times. Harry Markovitz, the distinguished US economist, winner of the Nobel Prize for Economics in 1990 and author of Modern Portfolio Theory puts it this way: ‘It is not the number of things you put in your portfolio, it is the number of things that are different.’
Either way you probably consider yourself a savvy investor who has set up your portfolio to match your financial circumstances and ambitions. But look a little closer at the details of your investments and a very different picture might begin to emerge. At first glance your portfolio, and your equity hol ings in particular, may look like they are well set up to reflect your investing criteria. If you’re the ca tious type you may have money spread across a range of protected equity and blue chip funds, while if you’re more adventurous you might well have money in funds specialising in emerging markets or fast growing industry sectors such as technology and energy. You will, of course, have taken steps to ensure that your investments are sufficiently diversified to protect yourself from a sud-
But there is another crucial factor to consider when reviewing your investment portfolio and strategy: correlation.
So return again to your portfolio and look beyond simple diversity to examine how correlated your assets really are. You may find that over time some of the funds you have invested in have, despite their seeming disparity, experienced their performance peaks and troughs at roughly the same time. For instance, funds specialising in the BRIC (Brazil, Russia, India and China) emerging markets could be highly correlated with funds devoted to energy and commodity stocks because of the dependence of the Brazilian and Russian economies and markets on energy and commodities. If you’re heavily
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exposed to both these type of funds you could find your portfolio under-performing if energy or commodities hit a rough patch. Equally, financial funds and property funds can be quite closely correlated given the interdependence between the two, so it pays to closely examine your exposure to these type of funds. Of course, you might look at things a different way and think that if your portfolio is heavily correlated then you’ll get more benefit when those funds are performing well. This is true but is obviously a very risky strategy to adopt as the downside can be very painful indeed. So now you can see how what might appear to be a cautious investment strategy can in truth be a risky one if funds that are relatively safe in themselves turn to be heavily correlated. Equally, a more ambitious investor might be spreading his money across a range of more
volatile yet uncorrelated investments and find that his approach turns out to be less risky than it appears. Solid portfolio returns are usually best achieved by successfully diversifying your investment across a range of assets and sectors and ensuring that they have their ups and downs at different times. This can be a tricky balance to achieve on your own so it’s best to turn to an experienced professional for advice. Your financial adviser will know a lot about diversification and correlation and will know which funds and investments will suit the type of investor you are and your financial goals. Their experience, expertise and qualified judgement will help you identify how correlated the funds in your portfolio really are, and whether your portfolio is suitably diversified to protect you from market turbulence. In the end, your financial adviser is the best person to help you discover the type of investor you really are.
About Neal Kelly is a Co-Founder and Director of Thomond Asset Management and can be contacted @ neal@thomondam.com 82 O’Connell Street, Limerick | T +353 (0)61 462 024 | F +353 (0)61 312 055 | E info@thomondam.com www.thomondam.com Folk Asset Management Ltd t/a Thomond Asset Management is regulated by the Central Bank of Ireland.
Warnings: 1. The income you get from an investment may go down as well as up. 2. The value of your investment may go down as well as up. 3. Benefits may be affected by changes in currency exchange rates. 4. Past performance is not a reliable guide to future performance. This outlook does not constitute an offer and should not be taken as a recommendation from Thomond Asset Management. Advice should always be sought from an appropriately qualified professional