If your life is anything like that in my home and office, the 2018 FIFA World Cup has completely overtaken your life and schedule. Suddenly, 2AM kickoffs at the local pub or kopitiam are normal. Bleary-eyed water cooler discussions in the morning about hot button trigger topics like Messi and Ronaldo being sent home on the same weekend, Neymar’s diving (or not), VAR, comebacks, abject failure, and epic wins become commonplace.
But have you thought about how this World Cup, with its dramatic results, is an almost perfect reflection of the uncertainty in markets all the time? Seemingly unstoppable teams felled by minnows. Living legends sent home empty-handed. Sure things suddenly looking extremely vulnerable. But on the other hand, obvious results which a blind man could have seen coming through. And entirely predictable results being played out. This World Cup, like the market, has everything for everyone.
The point is, you could be a hero and pick a winner. Everybody loves to pick a winner. But would you stake your house on it? No way! Would you stake your child’s education on it? No way! Picking a winner is a combination of luck, skill, observation and knowledge. In fact, you could throw out all the other factors and just retain luck, and you’d be about there.
But the rational man does not place his destiny in the hands of luck. He only plays the game when the odds are in his favour.
Imagine if you could bet on a basket of teams instead of only one team.? Let’s say you could pick 4 teams, and if any of those teams won, you’d win big. That sounds good, doesn’t it? What about if you could pick 8 teams? Even better! What about if you could pick 8 teams, but you only need to pick them when the final 16 teams have been decided? Better still!
That’s what diversification is all about: tipping the odds in your favour by increasing the odds of picking a winner and reducing the odds of picking a loser.
Of course, there is a cost as the winnings would be less when you undertake less risk. But when all is said and done, and the dust settles, it is almost always more prudent to lower risk, whilst maintaining your chances for return. Sir Alex Ferguson, one of the most successful football managers of all time once said, “Attack wins you games, defence wins you titles.” It’s the same with investing. As Howard Marks of Oaktree Capital once wrote, “The road to long-term investment success runs through risk control more than through aggressiveness.”
At Providend, we want our clients to enjoy long-term investment success, and diversification is a key part of our risk management tool kit. Or defence, if you like.
This is an original article contributed by Providend’s Editorial Team.
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