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Home / Investment Insights / “Plan your council and stay disciplined” Dr Warren Brown of Mi-Plan

“Plan your council and stay disciplined” Dr Warren Brown of Mi-Plan


By Dr Warren Brown, April 2020


Shifting priorities for an optimal portfolio
There are many risks associated with an investment and that impact on the performance of that investment. Some risks are relatively easy to measure such as the variability of returns while some are more difficult to assess such as the probability of a global depression.

A simple risk-return framework for optimising an investment portfolio is to ensure that the portfolio achieves three main objectives: meets the client’s liabilities, minimises capital loss and achieves competitive returns. These objectives often compete with each other in terms of the priority and, therefore, managing the optimal investment portfolio requires skill – skill in assessing market conditions and skill in money management. For example, minimising capital loss often requires a portfolio to hold a higher cash position and this may result in underperformance relative to competitors should the markets suddenly rise (assuming competitors hold less cash). Also, nobody seems to “time the market” correctly 100% of the time. Therefore, identifying the appropriate time to invest is one part of successful investing and deciding on the amount to invest at each opportunity is as important – the latter being synonymous with “keeping some powder dry”.

Identifying market conditions and managing money appropriately are key to managing the optimal investment portfolio. An important aspect to understanding the behaviour of the optimal portfolio is that the priorities of three objectives are dynamic (shifting) – they change with the changing market conditions. While markets were trending upwards, investors focused on returns relative to competitors and the associated risk of their fund underperforming peers. More recent focus has been on downside risk and meeting liabilities – an increasing number of investors are showing less regard for peer performance.


“Plan your play, and play your plan”
Not only is it reasonable that peer performance should be fading in priority as a main objective, so should short term investment performance as an evaluation tool to hire and fire a fund manager or a financial advisor. Good performance is not only about getting the results we want, it is, also, about being able to expect those results in a deliberate, predictable and repeatable manner. The latter is referred to as conformance and is as important as performance. Conformance obliges advisors and clients to “stick to the plan” – answering “Where do we want to be, and exactly how do we plan to get there?” rather than “Where are we?”

Financial advisors are facing a huge opportunity in the current environment of VUCA (volatility, uncertainty, complexity and ambiguity). Many investment portfolios will experience the inevitable shortfall in results due to current market conditions and neglecting clients’ dissatisfaction can be fatal. Investment counselling is the opportunity – focussing on the long-term goals and objectives for each client and relevance of the investment strategy for achieving the expected results to achieve those goals and objectives.


The perfect world is ambiguous
Portfolio construction with three competing objectives results in an optimal portfolio with a dynamic equilibrium. Changing market conditions and client preferences affect client satisfaction. Financial advisors and clients are often bombarded with “marketing material”, from the investment industry, from which it is difficult to discern what is relevant and what is not, fact from fiction.

The ambiguity and apparent chaos is an opportunity for investment counselling and the reason why it is important to follow a tested investment process in a disciplined manner.