Like Cup contenders, ‘playoff’ portfolios are built on defence
Goaltending strategy can help investors survive the hits, writes Martin Pelletier.
“Goaltending is a normal job, sure. How would you like it in your job if every time you made a small mistake, a red light went on over your desk and 15,000 people stood up and yelled at you.” — Jacques Plante
Spring was off to a great start for hockey fans with five Canadian teams making it to the first round in the chase for Lord Stanley’s cup. However, the playoffs are a thing of their own and quickly separate those who have what it takes from those who don’t — unfortunately, only two Canadian teams are now left to carry our flag onward.
Like most hockey teams, a wellconstructed investment portfolio will not only perform well during the “regular season” but will also be able to survive more challenging times in the market. Here are three factors to focus on to help separate a winning portfolio from a losing one.
MATCH THE STYLE OF OFFENCE TO RISK TOLERANCE AND MARKET CONDITIONS
Going on offence is not only important when it comes to scoring goals but also for generating healthy gains in a portfolio. There are many different styles of offence to choose from, such as owning higher growth, small-cap stocks; low-volatility momentum stocks; or more modest but consistent strategies such as those involving companies paying healthy dividends.
One’s overall risk tolerance and the market conditions at the time will often shape which strategy or combination of strategies to deploy. For example, in today’s environment we see better value and risk-versus-reward in owning the more experienced dividend paying companies — such as the utilities or REITs — rather than the high-flying “rookies” — high-growth stocks — many of which are trading at very expensive multiples.
DEFENCE MAY SEEM BORING BUT IT SAVES GAMES AND PORTFOLIOS
Having a good defence in hockey is essential to preventing the loss of a team’s hard-earned momentum. The same can be said for a portfolio: While holding non-correlated lower-risk assets may seem boring to most, they can be essential during those more volatile times in the market.
This kind of strategy is especially hard to implement in today’s low-volatility environment, when central banks are doing their best via monetary policies to penalize those who choose not to take on excessive risk. Making matters worse are fears over further interest rate hikes by the Federal Reserve, which have sent U.S. government bond yields higher, leading to losses for investors who held these defensive positions in their portfolios.
While this may detract from near-term performance, a strong defence will prove invaluable during those times a portfolio is under attack, such as a correcting market. We’ve seen very few portfolios that focus solely on offence end up as winners, especially for those close to or currently in retirement.
GOALTENDING — THE PUCK STOPS HERE
A good goaltending strategy means managing risk and preventing losses when it matters the most. Minimizing the drawdowns or periods of loss puts a portfolio that much further ahead of everyone else and reduces the need to employ risky strategies — think “pulling the goaltender” — to recoup losses.
Consider this: You have to double your money in order to get back to even after losing half of your portfolio — a feat that is doable but very difficult to achieve.
There are many different goaltending options available, from simply maintaining a proper asset allocation mix to more complex risk management tools such as options and derivatives.