The first half of 2023 has flown past, with plenty of noise in the year to date. If it’s not the banking problems in the US, it’s the sticky inflation that central banks are trying to tackle by raising interest rates.
It all then becomes a virtuous circle with one problem impacting another, and more noise likely to come. These events will continue to be talking points, but on a cheerier note the cricket season is well and truly here and that might offer some welcome distraction.
Investing is often compared to different sports, but I believe cricket is the ultimate comparator. Particularly test match cricket, where the pace is generally slow and steady, with each team carefully building their score over time. Investing requires similar patience and a long-term perspective.
Attempting to chase quick gains and ‘beat the market’ with short-term trades is risky and can often lead to losses. Successful investors typically take a measured approach, focusing on building a well-diversified portfolio of assets with the ability to grow steadily over time.
Like a test match, investing requires careful planning, strategy, and discipline. Investors must analyse their goals and risk tolerance and choose an investment strategy aligned with their objectives. They must also be prepared to weather market downturns (or the inevitable batting collapse) and stay committed to their investment plan, even in the face of short-term volatility.
We’ve experienced our fair share of volatility and dramatic headlines over the past few years. The constant stream of noise could, on any day, give investors reasons to sell (or declare, continuing my analogy). After building a solid score or investment portfolio over the past decade, it may be tempting that some time in cash is appropriate. However, there are notable pitfalls to succumbing to these periods of instability.
One of the key advantages of a test match approach to investing is the power of compound interest. Over time, even small gains can accumulate and grow significantly, leading to substantial long-term returns. Of course, this will be dictated by individual circumstances and time horizons and past performance is no indication of future returns.
Looking for fund managers with the special attributes of a test match cricketer can have many benefits over and above the T20 specialists that are keen to overtrade, chase returns and take outsized risk with high levels of volatility.
Fund managers with long track records of delivering consistent, above-benchmark returns with lower volatility and a focus on quality are better placed to deliver compound returns. Methodical managers who are the stewards of clients’ capital and those who, by consequence of their investment process, could accumulate a healthy total return over the investment period, are the ones to look out for.
Ultimately, a focus on return consistency is vital and can also impact investor psychology. Consistent returns can help manage investors’ long-term expectations and encourage them to stay disciplined and focused on their investment goals. In contrast, investments with volatile returns may cause investors to make irrational decisions that negatively impact their portfolios.
Investment markets and test cricket matches both ebb and flow. In investing, it’s important to remain disciplined and have faith in the investment strategy you’ve chosen. In cricket, the team play collectively despite fulfilling differing roles like batsmen, bowlers, or wicket keeper. Similarly, financial advisers and investment managers are all working diligently for the collective success of end clients, helping them to achieve their goals and objectives.
The test match approach to investing can really help investors focus on the longer term, striving to build a solid and sustainable total return with a focus on downside risk mitigation.
Isaac Stell is fund research manager at Parmenion. The views expressed above should not be taken as investment advice.