Keep on the right track

Richard Wood explains the benefits of an evidence-based approach to investing.

If you ask many investors what the definition of a ‘good’ portfolio is, they will respond that it is one that has performed really well. Yet, inevitably, that is something that can only be measured retrospectively.

A good place to start is to look at the investment process from a risk perspective, not a performance perspective.

Risk is the flipside of returns. If you focus on attractive returns, you are in danger of taking on unknown or poorly understood risks. If you focus on risk – only taking on those that are understood and adequately rewarded – you provide yourself with every chance of a successful outcome (although, in investing, nothing is ever guaranteed).

A ‘good’ portfolio is not about generating the best performance (with hindsight), but about how well the portfolio is likely to survive a wide range of market scenarios that may lie ahead.