David French | 18/02/2009 3:58:45 PM

This article was originally published in The Morning Bulletin in November 2005.

Some time ago my brother sent me an interesting snippet from e-bay. The item for sale was a time machine, for which someone was willing to pay $NZ13 or so. The ad indicated that the inventor had achieved mixed results, and the project was not completed. The seller said they’d consider a swap for an anti-gravity machine.

Is the past is better than the present? The time machine’s mixed results suggest that they’d be at least an even chance of experiencing a bad acid trip, landing in the middle of a world war or starving in a potato famine. I guess you might fluke a repeat of a 1980’s trip to Five Rocks (when driving there was a challenge), or seeing Skyhooks, Mental as Anything and Kids in the Kitchen at the Noosa Aussie Hop circa 1983, but the chance of jagging a specific day in the continuum of time seems remote.

More useful is the helpful motorbike instruction I’ve been receiving from old school friend, Ride Rite’s Guy Dolgner (http://www.riderite.com.au/Home.html). Guy’s given me a few excellent tips on staying upright on two wheels. The best one is always look ahead to where you’re going. The technique simply involves keeping your head up and looking to where you’re going, rather than at the road immediately in front of you. The benefits are smoother riding, less risk, greater stability and more control.

There is a significant analogy with investing. Looking at potholes takes away from the broader aim of where the portfolio is headed.

Many of the portfolios that we set up for our clients at Capricorn Investment Partners have a combination of shares, fixed interest investments, managed funds and property. While many people say diversification is not putting all your eggs in one basket, the real foundation of diversification lies in selecting assets that have varying characteristics. This is the core of modern portfolio theory. Even within asset classes a sensible investor will try to select investments that are not related.

Investors who do not keep an eye on the big picture tend to make a number of common investment errors. These include reacting to share price movements perhaps caused by minor events or media speculation, holding on to losing stocks for too long (or selling them just before they recover), and selling well performing stocks too soon. As a consequence, many people end up with a portfolio that lacks diversification, filled with stocks that all behave in a similar manner. This was particularly evident after the dot.com boom. People sold blue chip stocks to get on board the dot.com gravy train, but when it crashed, many were left with nothing. Conversely, the people who did hold on to better quality stocks have since made excellent returns.

A well diversified portfolio can afford to have some exposure to the riskier end of the market, if those stocks complement more conservative investments. The better quality investments will continue paying dividends and providing capital growth. All the data shows that this is the area to focus on, and so does experience.

The Investment Collective (AFSL 471728) is a non-aligned financial planning and investment firm specialising in providing tailored financial and investment advice for individuals and small business. Capricorn Investment Partners Limited's services include financial planning, share trading, portfolio management, insurance broking and self managed super fund administration. Additional information on services provided by The Investment Collective Limited can be found by following this link. Readers are reminded that this document has been prepared for general information purposes only, and any advice contained herein has been prepared without taking into account your financial objectives, situation or needs. Readers are advised to see their financial advisor prior to acting on any general advice.

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