Build a financial portfolio that Darwin would be proud of

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People change. Ideas change, dreams change, relationships change, preferences change. These are internal changes, in the way we think about life and the role of money in it. And while all of this is happening, the outside world is changing. Circumstances change, markets change, abilities change, employment and employability change, health and longevity change.

As we enter the New Year with hope and optimism, we leave a year that has given us a new understanding of the scope and scale of the change that can occur. We have all done our utmost to successfully exit on the other side of the pandemic. Families have worked hard to ensure that every family member has the resources and support they need to face the challenges of the pandemic. Companies have reassessed many long-held assumptions about their business environment and developed new ways of doing business. Governments have prioritized today over tomorrow with stimulus packages, and many have struggled to find a compromise between the lives and livelihoods of their citizens.

Change is an interesting thing, like the spices in your soup. Too much of it ruins the soup and makes it unpleasant to the taste, but the complete absence of it is intolerable. Like the movie Groundhog Day, the protagonist of which wakes up every day to encounter the exact same set of events as the day before. To some people well in a comfortable retirement, this may be familiar.

Unlike the spices in your soup, however, the change in your life is often beyond your control. Things happen, and you respond. Darwin identified long ago that “it is not the strongest of species that survives, nor the most intelligent that survives. This is the one that best adapts to change. “How do you build a portfolio that best adapts to change? I would say you would focus on building three things any great army general would do: resilience.

The stronger army usually wins. Stories of weaker armies emerging victorious are remarkable because they are rare. In addition, generally the larger army is the stronger army. Portfolios are similar in that the larger they are, the better their ability to adapt to change. People who have become rich during their lifetime often refer to the freedom that their wealth gives them, the freedom to spend knowing that they are unlikely to harm their wealth, the freedom to take money. new risks that they might not have considered before. . This freedom comes from a capacity to suffer certain losses without materially impacting their feeling of well-being, their independence. A habit of prudence and discipline over spending is the most proactive way to build a large portfolio, so that the money saved is available when needed.

Agility gives the ability to react quickly to change. In the face of adversity, an army that can redeploy soldiers and resources quickly and effectively in response to a new strategic direction is more likely to be successful. In a portfolio, this is best assessed by the liquidity of its components. In other words, when money is needed, how long will it take to convert the asset into cash at the bank? Plus, will your asset hold its value even if you’re in a rush to monetize it, or will it give up some of its value in the form of a haircut? We often see such a discount in distressed sales, whether they are real assets or financial assets. Liquidity can be assessed by the depth of the markets in which these assets are traded. While markets like gilts or large-cap stocks treat sellers equally whether in a rush or not, markets for small-cap, antiques, or substandard credit are likely to penalize those who are. in a hurry. One can keep a nimble portfolio by ensuring that it is invested in predominantly liquid assets.

Resilience gives everyone the ability to bounce back when hit. An army with multiple skills to draw on, depending on the context, is better able to withstand initial setbacks and emerge victorious. In a portfolio, this is best achieved by using asset allocation to achieve balance and diversification. The ability to achieve lower overall risk levels by including assets in the portfolio that have a low correlation is well documented. The inclusion of gold and debt may not set your portfolio on fire, but will provide a dampening effect during large corrections. Likewise, through geographic diversification, the overall risk level of the portfolio can be reduced without sacrificing much return.

The fact that “black swans” are more and more frequent is a testament to the fact that we are living in very interesting times. Owning the most adaptable portfolios to change will allow you to enjoy the excitement rather than being overcome by it.

Shyam Sunder is Managing Director of PeakAlpha Investment Services.

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