Think quick to stay ahead of the game

Herald Sun - - BUSINESS - with DAVID LIU David Liu is port­fo­lio man­ager at ATI As­set Man­age­ment

WITH the dust set­tled on yet an­other footy sea­son, it is worth re­view­ing some of the lessons from the West Coast Ea­gles AFL grand fi­nal vic­tory that are ap­pli­ca­ble to the mar­kets.

There has been no sin­gle cat­a­lyst for the re­cent mar­ket cor­rec­tion but un­cer­tainty on the im­pact of trade wars, to US midterm elec­tions, to the China growth out­look cou­pled with a do­mes­tic econ­omy that has been im­pacted by a royal com­mis­sion, a slow­down in credit growth and a prop­erty down­turn have all con­tributed to the mar­ket weak­ness.

The VIX bench­mark mea­sures the mar­ket’s ex­pec­ta­tion of volatil­ity.

Col­lo­qui­ally known as the “fear in­dex”, it is at its high­est since Fe­bru­ary, when the short VIX trade un­rav­elled.

While the price of volatil­ity is high, the key dan­ger is that un­der­ly­ing volatil­ity is ac­tu­ally higher and if this is priced into the mar­ket then in­creased un­cer­tainty means in­creased risk.

In th­ese types of mar­kets you need to pro­tect cap­i­tal and man­age down­side risk.

Sim­i­lar to the strat­egy the Ea­gles used in the Grand Fi­nal, the fo­cus should be on three Ds — De­fence, De­ci­sions and Di­ver­si­fi­ca­tion.

Some­times the best form of at­tack is de­fence.

West Coast won the Grand Fi­nal via a com­bi­na­tion of des­per­ate de­fence and good de­ci­sion mak­ing in the face of a first-quar­ter on­slaught by the Magpies.

Un­less in­vestors are able to short stocks, it is hard to get a neg­a­tive cor­re­la­tion in a port­fo­lio. How­ever, in­vest­ments can be de­fended by pur­chas­ing prod­ucts such as put op­tions or “bear” Ex­change Traded Funds (ETFs) that will in­crease in value if the mar­ket de­clines.

They come at a cost, but will mit­i­gate down­side risk and pro­vide some in­sur­ance in volatile times. With el­e­vated volatil­ity, sell­ing cov­ered call op­tions can of­ten pro­vide the premium to help fund th­ese strate­gies.

It is im­por­tant to have a re­al­is­tic in­vest­ment ap­proach that al­lows you make in­formed but timely de­ci­sions.

You also need to be flex­i­ble enough to ad­just when the en­vi­ron­ment changes.

When the West Coast game plan and strat­egy didn’t work they had to ad­just quickly or risk los­ing the game.

In volatile mar­kets in­vestors need to have the abil­ity to be flex­i­ble if con­di­tions change. In­vestors need to be ac­tively mak­ing good buy and sell de­ci­sions.

The in­abil­ity to con­trol emo­tions, par­tic­u­larly those of fear and greed, can of­ten lead to losses and now is not the time to have your head in the sand. In­vestors need to speak to their ad­vis­ers or fund man­agers to un­der­stand what de­ci­sions are made on their be­half.

Di­ver­si­fi­ca­tion means re­duc­ing risk by in­vest­ing in a va­ri­ety of as­sets.

West Coast had a di­verse list with a high skill level.

How­ever, there were key play­ers in the backs — Jeremy McGovern, mid­fielder Luke Shuey, and Josh Kennedy in the for­ward line. They all had ner­vous mo­ments early but were cru­cial to the end re­sult.

Sim­i­larly, hav­ing ap­pro­pri­ate di­ver­si­fi­ca­tion in a stock port­fo­lio means hold­ing high-qual­ity shares in key sec­tors and en­sur­ing you back them in tur­bu­lent times, as long as the in­vest­ment the­sis re­mains in­tact.

Al­ter­na­tively, rather than dou­bling down on loss-mak­ing po­si­tions in the hope they come good, con­sid­er­a­tion should be given to cut­ting losses and di­ver­si­fy­ing into new po­si­tions. Mo­men­tum stocks and value traps need to be treated with cau­tion.

In this mar­ket, do­ing noth­ing gets you noth­ing.

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