What the world’s most sophisticated investors know

Monday 10 Dec 2018

Sophisticated investors know all about the saying, ‘greater knowledge and understanding leads to better choices’.  Whilst professional investors don’t have a crystal ball, they do have an extensive toolbox of information and analytical techniques at their disposal.  Let’s take a look at some of these tools you can use for your investment strategy.

Successful investing is both an acquired skill and a process.  It has little to do with luck or being born wealthy.

Considering that most lottery winners end up broke, it would be fair to say that ‘money does not make money’.  The players are never the long-term winners at a casino – the owners are because they have the mathematical advantage. The same theory applies to investment.  Sophisticate investors know there are no certainties, but they do know how to tip the odds in their favour.

So how does a private investor think like a sophisticated investor? How can one construct a portfolio that achieves better returns with lower risk?

A sophisticated investor’s toolbox:

  • Clearly defined risk and return objectives.
    They carefully set their risk and return objectives for their investment portfolio

 

  • Take expert advice when needed
    They know when to spend the money to get good advice
     
  • Sufficient compensation for risk
    They seek out investments with the level of return based on the risk they are undertaking

 

  • Use short strategies
    They make sure of leverage and short-selling to expand their investment options, reduce their portfolio risk and profit from falling asset prices.
     
  • Diversity portfolio assets across asset classes
    To ensure their portfolio performs well under a range of economic conditions, they combine investments that are characteristically different. They ensure their portfolio has good downside protection for when markets fall.
     
  • Stress test their assets
    Sophisticated investors ask themselves ‘what if?’.  They stress test against previous economic events and perceived future events.
     
  • Portfolio performance reviews
    They regularly review the performance of their portfolio against pre-defined criteria.   They make changes according to long-term outlook, not short-term performance or media hoo-ha.

 

  • Ensure they have an income stream
    They steadily grow their capital base in real terms (after inflation and tax) and ensure they can draw a sustainable income stream.