There are some weeks when you get different news stories which seem totally unrelated but they have a theme underlying them which draws them into one.
So it was in the past week as we read about Donald Trump and Pep Guardiola. One trying to win a presidency, one trying to build his football team.
Trump, it seems, ‘lost’ another presidential debate. Guardiola’s Manchester City were humbled by Barcelona in a European tie and are out of the League Cup. Are they just struggling in the short term, or is this a symptom of something more pronounced?
What has been the consistent point with these stories is the unwavering, unbending attitude both have shown to continue ploughing on. Both individuals are unwilling to budge from their basic stance or principles.
This can be looked at in two ways: Either they are acting in a steadfast fashion, refusing to bend to popular opinion or criticism, or you could say that they are being stubbornly inflexible. It is our view it is the latter, in which case their lack of flexibility is likely to cause them unnecessary losses.
And this is where we can turn to money and draw some parallels. Managing money and especially invested money, is primarily about avoiding unnecessary losses.
We have banged the drum time and time again on this subject: losses are devastating to long term returns.
To get the best long term returns you need to focus on the risk, not the return. This is the basic principle behind the asset management strategy we apply with our clients, the Advanced Investment Strategy (the AIS).
The AIS has a wonderful track record over more than two decades. This is because it works on a simple, but powerful, basis:
- It uses classic investment principles and starts with establishing the correct asset allocation that should be used
- It is a risk managed ‘first’ process – managing the risk is the first principle
- It uses active asset allocation to manage the assets on an ongoing basis
It is that third bullet point where we think Trump or Guardiola would fall down. Their absence of a flexible approach would be completely contrary to how the AIS works.
Trump won the Republican ticket by appealing to a partisan population of right wing support with a style and approach which clearly wouldn’t appeal to the middle ground voter; his opportunity to shift his position towards this wider group has long since gone, he lacked the flexibility to move on and adapt accordingly.
He should have shifted ground once he moved from the fight for the nomination to the fight for the presidency. He now relies solely on an anti-Hillary vote.
Guardiola produced a style of football at Barcelona suited to some of the world’s greatest players in a league totally different to the one he now manages in. He has (so far) failed to move on and develop his principles in the new environment. He has different players (surely not as good?) and a different opposition week after week.
Maybe one or both will prove their way works. We doubt it, but we accept we may be wrong. However one thing is for sure, their style of management would fail in the world of managing assets or wealth or funds.
In that world, flexibility is king. The correct asset allocation of monies (or funds etc.) five years ago will not be the best asset allocation today. By “best” we mean the most relevant to optimising risk/reward.
This has to change from time to time to adapt to the changing nature of returns. This is not to suggest that investors should trade. This is NOT what we mean; what works, and this is proven, is a consistent approach to adapting the allocation of assets to the changing returns generated by different asset classes.
This is not even about predicting future returns, it is a method of evaluating how returns vary over time and ensuring the allocation is adjusted accordingly. This can be as simple as moving a portfolio back to its original stance when the asset returns imbalance the portfolio, simply by their varying returns.
So, at a most simplistic level, a 50/50 portfolio between equities and bonds is no longer a 50/50 portfolio if the value of the equities rise by 40% and the bonds by 10%, those simple changes (over time) caused by the differing returns, create a future imbalance. The successful investor, based on the most robust academic research and evidence, will know that to optimise their positions, they will need, from time to time, to get their balance corrected.
This is how the AIS works. It works through this flexible approach, one which is active and adaptable.
Neither Donald nor Pep would be able to accommodate this with their intransience – based on their statements during this past week.