Investment advice: Aim for a B+ average, it's better than taking a big risk and scoring an F

By Caroline Ritchie

1 comment
Caroline Ritchie is a former AFA, sharebroker and portfolio manager.
Caroline Ritchie is a former AFA, sharebroker and portfolio manager.

Perfection might be a wonderful financial mistress, but she is a hopeless investment wife.

It is one of the more unhelpful themes in the world of shares - that we should be constantly looking for the best.

The most successful fund manager, the biggest profits, the strongest stock cocktail, the coolest new listing. The industry touts itself with flurries of slick charts and glossy promises (not wrong or illegal, but let's recognise them for what they are).

This colourful marketing competes for our attention and you'd be forgiven for thinking that investing is a game where we can pick the fancied hotshot ideas, the shiniest tinsel in the bunch, each year, and roll our way to wealth.

Ahhhh, sorry folks, but I've got the axe of reality ready in my hand again.

If you always hanker for your portfolio to be an A+, you are setting up for disappointment. In nature, the A+, the pinnacle of performance, exists only fleetingly. A cheetah can sprint at 96 km/h for 50m, but lies under a tree, buggered, for the rest of the day.

The A+ is a short burst of brilliance, followed by quite a bit of D minus. Investing is no different. The fund that achieves an outstanding return once, (or twice, or even five times) is not likely to be able to repeat this ad infinitum.

This, interestingly, is nothing to do with the fund - every manager wants to be top dog - but is centred around the traits of the sharemarket, which, in my opinion, get more random every day. Striving for perfection is not rewarded here. It leads to bias and emotional skew. Throw in the fact that the markets are hardly beacons of efficiency, and you have a tricky (impossible) task ahead to try to beat it with consistency.

If you do your own investing, reaching for glory all the time is going to hinder your progress. First, you are statistically extremely unlikely to beat the index over any decent stretch, (some studies show you and all of those shooting star fundies have the same chance at this - not much). You will attempt this A+ experience besides, because that is what we all want and desire - to better thy neighbour.

You will assume a higher risk than is needed. When things are bad to the downside, annoyance and anguish set in and your judgment becomes hamstrung. You clutch at a loser too long, or jump ship to the next thing, hoping for a rescue mission. What usually happens? You end up way back on your scorecard, down there in the Cs.

I say FORGET IT! Aim for a B+ average. You can go a very long way on it. Maintaining a B+ average is like the lactate threshold for a portfolio: unexciting moving speed, but it chugs along all day.

What is important during your investing journey is the OVERALL result, and here the scorecard is useful. It means getting about 80 per cent of stuff right, not making giant single bets, spreading the liabilities and accepting losses when (which they will) occur.

Sure, have a punt on something exciting from time to time. A small one.

Just be confident that if it does implode (which marks it an "F") your big picture still looks decent. Keeping a tally in mind like this allows you to preserve some sanity, and your money. It's pretty good for life in general, too.

• Caroline Ritchie is a former AFA, sharebroker and portfolio manager. She runs Investment Stuff, a sharemarket based investment coaching service. Visit her at www.investmentstuff.co.nz. This column is not personalised financial advice.

- Hawkes Bay Today

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