Building a winning investment strategy

A strategy for winning the Tour de France has a surprising number of elements in common with winning the race in investing and financial planning, according to Edward Smith.

Any keen cyclist is likely to be reading this with blurry eyes, thanks to several recent late nights (or early mornings) watching this year’s Tour de France – something I have been guilty of! 

As both a very enthusiastic cyclist and an investment professional, I’ve also spent some time over the last week thinking about the strategy behind winning the Tour de France. 

It strikes me that there are distinct similarities between a successful Tour strategy, and a successful investment strategy, and investors who understand the importance of such a strategy stand a better chance of achieving their long-term financial and lifestyle aims. 

Winning the tour 

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Within cycling, there are all sorts of specialists. The best sprinters have perfect timing and immense power, and can switch on a burst of acceleration for a short time when most needed. 

Time trial specialists have plenty of power coupled with a highly efficient cardiovascular system, allowing them to maintain high power output for long periods of time. 

For mountain climbers, the key statistic is the power-to-weight ratio. They invariably have a bird-like frame, but are also very tough mentally and have immense stamina.  

However, the attribute of pure power that makes a great sprinter, entailing plenty of fast-twitch muscle, becomes a liability in the mountains. 

Conversely, climbers can’t sprint with the best. Long stages on rough roads tend to wear down the lighter riders who are better at mountain climbs, but suit time-trialists who are both strong and fit.

But time trial specialists must grit their teeth to hang on in the mountains. It’s a very rare individual who is good at everything. 

The result is that any team in the Tour with a chance of winning is made up of a combination of these specialists. Working together, these specialists take the team, and its leader, one step closer to the ultimate goal.  

Furthermore, any cyclist who has ambitions to win the Tour must develop a plan that involves winning the stages that he is best suited for, and be part of a team that can provide support in terrain that does not suit him.

Anyone who watched last year’s Tour, and saw the way that ultimate Tour winner Bradley Wiggins benefited from his team’s support, can have no doubt about the importance of the team, and their commitment to the overall strategy, which resulted in Wiggins standing on the winner’s podium.

There’s game-playing and strategy behind every winner, which dictates when to challenge and when to hide. This is what makes a three-week tour so enthralling. 

Lessons for investors 

It seems to me that investing has a number of similarities. 

Some investments suit certain conditions, but not others. There’s no such thing as an investment that’s ideal for all conditions. 

All investors need a strong, diversified set of assets that can carry them through the bad times but make great gains in the good times. 

They need a strategy and, perhaps most important of all, they need a “coach” or adviser who can see the big picture and help keep them on track. 

The best strategies take account of the market conditions, just as a cyclist plans for changes in terrain. Investors can’t expect to be in front every day; in fact, just like a cyclist in the Tour, they can win the overall race without winning a single day. 

The secret to success is consistency – limiting losses on the bad days and taking advantage of all the opportunities available on the good days. 

A good long-term strategy includes investments that can kick into a higher gear when conditions are right, and deliver short-term outperformance.

But at the same time, the strategy also needs to have exposure to solid, stable investments that will keep delivering even in the most difficult and adverse of conditions. 

The danger for investors is when they see other investments overtaking theirs, or one of their investments struggling because the market environment isn’t in their favour. 

In these circumstances, it is tempting to make changes to the strategy or to the team. While this may seem like a rational reaction, it usually comes far too late. 

The result is a pattern of buying on market highs and selling on market lows. This is hardly a plan to help win the Tour. 

Building strategies 

The best long-term strategy looks very different to a short-term strategy. It can take time and patience for a strategy to deliver results, and it takes courage and resolve to stick with a strategy in the face of setbacks.  

However, to me this doesn’t mean having a ‘set and forget’ strategy. A strategy will need to adapt to changes in the environment, personal circumstances and goals over time. 

Most people go through major life events, and experience ups and downs that should cause them to re-evaluate from time to time – regardless of the market environment. 

Furthermore, investment markets are not static. They adapt to changes in tax, legislation, politics and myriad of other factors. Even if an investor’s goals stay the same, there may be times when it is necessary to adjust the strategy in order to stay on track. 

Going back to the cycling analogy, there are factors that lie outside the control of even the best race manager.

For example, the weather plays a huge role. Those bird-like climbers are not well adapted for wind and rain. Crashes might take out the star rider, or his form might desert him at a vital moment. 

The best teams have ace mechanics to at hand, use the best equipment they can afford and do their best to support their riders. Crucially, they re-evaluate their plans as the race unfolds. That might mean switching support to the in-form rider, or adjusting their goals altogether. 

A Grand Tour is actually a number of races within a race. Teams might be aiming for stage wins, focused on the points competition or winning the ‘King of the Mountains’ jersey. 

Each goal is worthy and requires a unique strategy. With teams focused on different goals there are opportunities for riders to collaborate and share the spoils of victory. You are not likely to see Chris Froome elbowing Mark Cavendish out of the way to take a sprint. 

Out in the investment world, each investor has a unique set of goals. The best strategy is different depending on the goals. 

So it really doesn’t make sense to copy the strategies of friends, relatives, acquaintances or even a favourite investment guru. Their goals are not are unlikely to be your goals. 

The three main determinants of strategy are risk appetite, timeframe for investment and sufficiency of the current portfolio. 

For example, saving for a house requires quick wins and aggressive cost control. The goal is short term, so investment returns won’t make much difference. But investment losses would be a major setback. This is the investment equivalent of a stage win.  

By contrast, saving for retirement is a long-term goal. Investment returns are critical. It’s possible to recover from bad years, and an aggressive savings habit might not be sustainable. It will be important to take a steady, stable approach to achieve this goal. This is the equivalent to riding to win the Tour de France. 

Edward Smith is head of portfolio management at Australian Unity Investments (AUI), and a keen cyclist.