Metres After Contact

Dust off the bootcut jeans and brown shoes, the Six Nations is back.

Being somewhat of a traditionalist, I’m not too sure how I feel about the big Thursday kick off. Though I suppose it gives the Cityboys a legitimate reason to stay in the pubs after hours this week.

Like seemingly every other sport rugby has now succumbed to excruciatingly detailed analysis of every moment of every game. If it can be measured it, it can be managed etc. etc.

And one such stat that teams refer to in pursuit of marginal gains is “metres after contact”.

I like this stat, tells you a lot about a person. If a player consistently makes good ground after being tackled, it is evidence of her resilience - that she can take a hit and keep moving forwards.

Investing, like life, can’t all be plain sailing. It won’t always be wide open green grass ahead of us, there will occasionally be a couple of angry looking Frenchmen in our way.

In a similar way, as long term investors we have to make peace with the fact that we will naturally be periodically buffeted and barged by the tides of economic woe, of geopolitical turmoil, from time to time.

It is during these periods that we find out how resilient our portfolios really are. If we are properly diversified, we can absorb the impact and keep moving forwards. If not, we crumple.

Proper diversification doesn’t fully insulate us from all of the pain, but it does make it manageable enough to get through to the next phase. A properly diversified investment strategy offers signs of life just regularly enough to give us hope.

The challenge for us all is that during the good times, diversification (and risk management) fall out of vogue. During the good times our eyes can be drawn away from what we know works, towards brighter shinier objects. And these shiny objects will always be doing better than the boring stuff we have in our portfolios as an insurance policy.

But each time we sin a little and accept less diversification in order to indulge our “financial magpie” we chip away at our portfolio’s future resilience and increase the probability that our finances will fail to negotiate the next thing, whatever it is.

As ever, this message isn’t particularly sexy. It doesn’t make for great copy. But diversification works - and it doesn’t even need to be complicated.

The table above (which I’ve put together in the past and updated this week) shows the calendar year returns for bonds and stocks. Since 1990 bonds have only generated negative returns in 3 out of 36 calendar years. The global stock market did a little worse, generating negative returns in 9 out of 36 calendar years.

But, and this is the important bit, there have only been two years in the past 36 where stocks and bonds have both generated losses - and 1994 was hardly a disaster.

It may mean giving up some return, but this is diversification in action.

I would have a hunch that the people we admire the most all share a similar trait.

They haven’t flown through life care free, they have had to bear some misfortune and persisted. They negotiate difficulty with dignity and keep moving forwards - metres after contact.

Part of the charm of this life of ours is that we can’t pick and choose what challenges we will have to bear.

But as investors we can choose how much pain we will have to negotiate in advance. And the good news is that we needn’t endure terrible pain to receive the right outcomes - the whole point of building a financial plan is that we can determine in advance how much burden (in the form of short term pain) we need to accept in order to meet our goals.

Planning properly doesn’t guarantee that we will emerge unscathed, but it does give us the best chance possible that we will be able to persist long enough to reap our rewards.

Past performance is not indicative of future returns. None of the above is intended to represent advice to any individual, if you have any questions about your situation please consult with a regulated financial adviser.