The keys to investing success: Balancing attack and defence

THERE is a saying in football: Goals win games, defences win leagues. It is the same in investing, with the strategy relying on balancing how aggressive you want to be with how much risk you can stomach.

To use a football analogy, a reasonable starting point may be a 4-4-2 formation.

Ask any 10-year-old football fan who their favourite player is. Chances are it is somebody who scores a lot of goals – Lionel Messi, Cristiano Ronaldo, Mohamed Salah or Erling Haaland. A similar concept is true across other team sports – for instance, quarterbacks, wide receivers or running backs in American football, and backs in rugby and batsmen or all-rounders in cricket.

As we mature, the appreciation of other aspects of the game rise in our consciousness. We shift our focus from goals to appreciating tackles, saves, turnovers and, yes, even cumulative dot balls.

My investing journey

I have been on a similar journey when it comes to investing. After graduating, I consumed book after book about investing. Most of them fell into two categories – stock picking or market timing. I was trying to figure out whether I wanted to be Warren Buffett or Peter Lynch.

However, over time I have come to the view that a diversified portfolio should be the starting point for every investor, including myself. There are many reasons for this, but the main one is to stay in the game.

In football, you concede three early goals and the chances of you coming back from that are extremely low. Therefore, having a clean sheet is a great starting point. And, of course, in a league format there is always the game next week.

In tennis, the analogy is staying in the point. Sometimes this is all you can hope for, but it opens the possibility of the other player making a mistake, letting you win the point.

Staying in the game

For wealth builders, the equivalent to staying in the game is staying invested. This, above all else, distinguishes the winners and the losers.

But this is much harder than it sounds when equity markets are down 50 per cent, or a sector loses 90 per cent, and the news headlines make it feel like the world is falling apart.

Companies go bust, and industries and sectors go through boom-bust cycles, as do equity markets more broadly. It is here that the strength of your defence becomes critical as it helps to smooth out the ride and helps you stay in the game.

There is a lot of academic literature that shows that the pain of losing money is much more than the joy of making money. Therefore, the idea that you should put all your eggs in one basket is really risky, especially if the basket is very small and has a high degree of risk.

If you are young and have invested $10,000 only to see it halve in value, maybe you will be able to tide over the volatility as you have much more time to see it recover and can take advantage of markets going on sale.

However, if you are older and have invested $1 million, losing half of it is probably much harder to take given its potential implications for long-term financial security. It can even affect the relationship you have with your other half.

Attack versus defence

This leads us to the point that you need to balance attack, midfield and defence.

If you think about it, strikers take greater risks because the upside – a goal – is much larger than the downside of losing possession a long way from your goal.

From an investment perspective, your attack would be through equities or some areas of private market investments – most obviously private equity, but also potentially private credit and real assets, such as infrastructure.

These investments are the ones that grab the imagination and the headlines. Your attack is meant to drive significant long-term capital growth in your portfolio, well ahead of inflation. And they can propel your portfolio to new heights that you probably never imagined.

We all underestimate the power of compounding over long periods of time because our brains are programmed to think linearly.

However, just like strikers, they may experience a barren spell or some investments may even fail to perform at all (which is why most top clubs have multiple attackers in their team).

This is where your midfield and defence come in. The defence keeps you in the game while the midfield may even nick a goal or two to offset the challenges up front. Therefore, the more diversification you have in a portfolio, the less likely you are to lose your shirt and give up on investing entirely.

In investing, your goalkeeper and defence are effectively cash and high-quality bonds. Cash is there to bail you out when the rest of the team lets you down, while high-quality bonds provide significant ballast when the going gets tough.

The midfield can be assets in between equities and high-quality bonds, such as the riskier parts of the bond market, gold and hedge fund strategies.

Finding the right balance

The exact balance in your portfolio depends on how aggressive you want to be and your ability to weather short-term losses.

However, a useful starting point might be investing’s equivalent of football’s 4-4-2 formation: 40 per cent in equities, 40 per cent in bonds and 20 per cent in alternatives (private assets, liquid alternatives and gold).

Of course, you can always tweak this formation, by adding or reducing your equity exposure should you want to increase or reduce your long-term expected returns in exchange for higher or lower peak-to-trough declines along the way.

Whatever you decide, it is important to remember that each player has its role in the team. While one set of players might shine in certain games and situations, just because other players are not shining does not mean that you do not need them. They each have their time in the sun.

The key is to focus on the power of the collective and maintain a balance between attack and defence to smooth out the ride as much as possible. This strategy should help you achieve your long-term goal of winning the investment league.

The writer is global chief investment officer at Standard Chartered’s wealth solutions unit