This past weekend I got some great exposure to the freestyle skiing scene while taking in my son’s first competition in the sport. I have to admit that it is quite exciting to watch, especially the high-flying tricks in the two main events: moguls and slopestyle.
Interestingly, in both categories winning depended on the athletes’ willingness and ability to take risks when descending the course, even though the approaches were slightly different.
It struck me that this was not unlike investing, in which the results are also often strongly correlated to an individual’s appetite for risk, adjusted for the current market conditions.
With that in mind, here is a freestyle-inspired look at two different kind of portfolios, and why it is imperative to determine what type of investor you are in order to devise a plan that offers the greatest chance of success.
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The mogul portfolio
In the mogul event, it is common for 80 per cent of the points to be awarded based on how well and how fast an athlete carves the bumps (i.e. staying on track and the form and technique of turns) with the remaining 20 per cent assigned to the execution of the jump (trick, level of difficulty, landing and take-off). However, freestyle athletes sometimes fall into the trap of focusing too much on the excitement of the jump, which can prove to be a very costly mistake.
Likewise, investors are often enticed by high-growth segments of the market that are exciting or sexy — or that command a lot of attention given their strong recent performance.
Trying to keep that 80-20 balance in mind, however, is crucial.
This doesn’t mean risks can’t be taken — a steeper pitch for skiers, a higher equity allocation for investors — but that it can’t detract from the 80 per cent that really determines the outcome.
Based on our experience, most high-net-worth investors fit within a mogul-type portfolio.
So, for example, a high-net-worth investor in a balanced portfolio would have no more than 10 to 20 per cent of their holdings within a higher growth component, 40 to 60 per cent in moderate growth (international blue chip equities), and a minimum of 25 to 30 per cent in fixed income, which will soften the blow in the event of a crash.
The slopestyle portfolio
In the slopestyle event, freestyle skiers are judged by their ability to perform a sequence of tricks on rails and large jumps. They are scored based on amplitude, difficulty, execution, variety, progression and combinations.
With more tricks, the event can be exhilarating to watch and inherently more risky than the moguls.
But that doesn’t mean it is all high risk, all the time. Offsetting some of those big tricks with the more technical rails section can provide a winning formula too.
For investors who take the slopestyle portfolio approach, that could mean a majority weighting to equities with as much as 15 to 20 per cent to fixed income depending on where the market conditions are at the time.
Higher growth segments (i.e. FAANG stocks, private equity, alternatives etc.) could encompass a larger part of the equity portfolio but would be matched by more moderate segments such as blue-chip equities in developed countries.
Either way, one must be willing to accept that the pain of crashes is often correlated to the excitement of a high-flying portfolio and in that way, investing at the extremes may be more of a younger person’s sport.
Martin Pelletier, CFA is a Portfolio Manager and OCIO at TriVest Wealth Counsel Ltd, a Calgary-based private client and institutional investment firm specializing in discretionary risk-managed portfolios as well as investment audit and oversight services.