From seven habits to seven critical questions

The benchmarks section below provides "as at today" results on specific funds, but the average investor's overall result is a performance cocktail from a range of funds and assets. Where then is the "cocktail mixer", and what are the main ingredients?

Sounds like one of those hardy perennials where the answer stands the test of time. Not so. Public taste is hampered by the performance and volatility ingredients, to the extent that the flavour of the month back in November 1993, would be unpalatable today. Today's focus is very much on the current questions to ask of your portfolio, or your portfolio adviser.

Most important thing

From the front, as Stephen Covey, said, "the most important thing is to keep the most important thing the most important thing". The most important thing is, what is your target? The whole point of the benchmarks section is to provide a range of benchmarks.

The indices (or relative benchmarks) are great for regular savers building capital, whilst the inflation, cash and bond rates support those looking for "absolute returns", typically those that have already built capital. Ultimately, all regular savers become capital investors.

Minimum benchmark

The inflation stats show the minimum benchmark we need to beat to preserve purchasing power, and you can take the cash and bond rates as your 'risk-free' free rate in that you can go to the bank and get this yourself.

For something more, investors need to focus on "absolute returns", a margin over the risk free rate to accommodate charges. Call this an extra two per cent, although it will be smaller for large sums. In the early 1990s an absolute return might have been somewhere around 10 to 12 per cent per annum; today, the taste buds are reformed by lower inflation and increased volatility towards something above seven per cent per annum.

This is telling us that the five per cent per annum net products being touted, are really being offered at the lower end of the risk spectrum. Flavour of the month for some. Minuscule risk-free growth.

Question two, and keeping things important…what currency? This is really important to the average expat investor tuning in.

For dollar thinkers, the devaluing dollar is of minimum portfolio concern. After all there are loads of dollar or dollar-linked investments out there, which denude the need to take currency risk.

However, if the dollar is going to go into "temporary decline" as advised last week by Andrew Mackay of AGM asset Management. This is not good news for Indians, South Africans, Aussies, Canadians, Europeans, Chinese and all others currently holding dollar assets.

Corollary question

The corollary question to ask of your portfolio, have I got enough of my domestic base currency? If your domestic economy is a strong one or on the ascendant, and the weighting is less than, say, 30 per cent, the answer might well be "no".

Question three, what is the level of charges I am paying and what are my early surrender charges? Being a "get rich slowly" dude, very slowly to some, it is a bit of a nonsense to concern oneself on withdrawal problems within five years for lump sums and ten years (put back further by current systemic risk) on regular savings.

For those looking for self-responsibility, don't expect dramatic results within these time frames simply because it is an unreasonable expectation of the market. Therefore, look for vehicles that "don't hurt", where the withdrawals are outside the time frames. To those offering you results within five years, high-risk end of the portfolio or gobbledygook, the technical term for "yeah right".

Withdrawal and annual charges though are different things, from the 'absolute return" we quoted above that our capital investments need to live within an average charge of about two per cent per annum to justify being outside the 'risk free' for low risk investors. Expect a bit more, but don't pay a lot more for regular premiums.

Questions four, five and six, are all specialist subjects in their own right. They need to be asked, but they aren't going to get the space here. Synopsis format, what is the risk/return expectation? What will the asset allocation be? And what is my level of diversification? They overlap to some degree.

Critical points

Critical points are, on risk/return, for an eight per cent per annum return what are my "downside expectations?" For a 20 per cent per annum return, what are my "downside expectations?"

Covered last week by reference to the Sortino Ratio, checking out the number of losing months, and the "standard deviation". Safe to say, if you don't know the answer to this, expect a bumpy ride. I haven't seen a report that says volatility will go away.

Asset allocation is variously recorded as influencing performance by a factor between 80 and 95 per cent. Not market timing, not trading. The assets being chosen for the cocktail in the 1990s are not the same as those currently being used by investors/institutions conscious of being performance role models.

The Harvard Business Review Pension Plan, formerly with a less than 30 per cent "alternative strategy" weighting, now sits nearer to 75 per cent. Time to review the asset allocation, an exercise that should also throw out whether there is enough diversification.

So to question seven, not the most pressing in a rising market (one in which everyone makes money) but ultimately critical to ongoing results.

Can you afford to stay "passive" with the amount of volatility and change that infects market performance? With rising markets you're fine, when the tide's in, the ships will bob up.

The tide changes much more radically these days, and for those that recognise "self-responsibility" in other aspects of life the "active" route will increasingly become the one that keeps you informed, reduces stress and improves the prospects of steady performance.

The author is the managing director of Mondial (Dubai) LLC