1st September 2010

Prevention is better than cure

IFA letter of the week

We're an irrational bunch - investors that is. We always will be; we can't be cured.

We seem to go out of our way to destroy our long term wealth prospects. We bottle it when markets fall, sell and then miss the recovery. A passive or active strategy - it doesn't matter, our irrational behaviour ruins both.

Of course it's not our fault is it? We're exposed to the internet, clever adverts, the financial press, peer pressure, that fella in the pub, our accountant, our golf/squash partner etc.

Possible cures are sticking to cash or never speaking or listening to anyone. Neither is realistic.

We could prevent irrationality by reducing short term volatility and negative performance on at least part of our portfolio.

Absolute return investing could achieve this - well at least in theory. It's a devilishly complex sector. Many absolute return funds are highly correlated to equities and few are able to demonstrate disciplined risk management - these are best discarded in our preventative quest.

There are funds that have low correlation and stringent risk management. Even better - you can combine them and achieve zero equity correlation and low volatility. This should produce smooth positive returns regardless of market direction.

Consistent positive returns in one part of a portfolio go a long way to offsetting negative returns in another. They also calm our nerves. We're therefore much less likely to act irrationally in the short term and do ourselves untold long term damage.

Help us eradicate irrationality. Think prevention not cure.

Jeremy Askew
Conduit Financial Solutions
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Adviser Letter of the Week