![\"\"](\"https:\/\/www.innov8fs.co.za\/blog\/wp-content\/uploads\/2022\/12\/gg.jpg\")
<\/p>\n<\/p>\n
The World Cup is in full swing, and on the field remain the final four teams \u2013 one of which will lift the golden trophy in just under two weeks. During the 2018 World Cup, BetaShares published a piece focusing on the individual ETFs that an investor could potentially use to form a\u00a0winning portfolio. While the investment lessons from that time remain relevant to investors today, the following piece will explore some additional lessons that this year\u2019s World Cup can teach us against a backdrop of turbulent, ever-changing markets.<\/p>\n
Notable stories concerning the football played at this year\u2019s World Cup have, unsurprisingly, focused on the numerous upsets \u2013 where renowned footballing nations such as Argentina and Belgium have been humbly thwarted by the likes Saudi Arabia and Morocco. These \u2018shock\u2019 upsets have occurred in previous World Cups (think Ireland defeating Italy in 1994 or Cameroon defeating Argentina in 1990), but not with as much frequency as the 2022 competition.<\/p>\n
In investing, the possibility or risk of suffering large negative returns due to shock events is referred to as \u2018tail risk\u2019. Events like the GFC, Black Monday, the COVID crash, and the stock market decline driven by Russia\u2019s invasion of Ukraine all fit into this category. Looking ahead into 2023, risk is prevalent \u2013 with core inflation remaining elevated and global central bank monetary policy further straining economic activity. Market analysts are also noting that equity1<\/sup>\u00a0and\u00a0commodity prices\u00a0are expected to fall further as slowing global growth dampens demand2<\/sup>.<\/p>\n Yet, as we sit here \u2013 hoping for the end of the rate hike campaign, but not yet necessarily focusing on the potential negative economic consequences of this recent\u00a0central bank action3<\/sup>\u00a0\u2013 the question remains: how do investors prepare for more market shocks? The principle that should underline an investment strategy to assist in preparing for market shocks is diversification, while also remaining flexible enough to adapt to changing conditions.<\/p>\n Much like the interconnectedness of a successful football team\u2019s defence, midfield, and attack, having a portfolio that is constructed from a variety of asset classes (such as Australian and international equities, fixed income, cash, and property) to balance exposure, seek to enhance performance, and minimise risk in one\u2019s portfolio is crucial. In simple terms, diversification is about not putting all your eggs in one basket.<\/p>\n Portugal has shown in this World Cup that it has the flexibility and depth to adapt to new challenges. This was shown recently with the tactical benching of star player Cristiano Ronaldo, whose absence was not felt as the team comprehensively beat Switzerland 6-1. Further, following its frustration with the USA, England altered its formation and changed its Starting XI twice to achieve positive results in matches against Wales and Senegal. Similarly, with changing market conditions and greater market unpredictability, investors will also have to be flexible in the year ahead.<\/p>\n The variety of investment options offered by ETFs not only allow portfolios to be diversified (and to be built simply), but they also offer a high degree of flexibility \u2013 whether this be through investors adding thematic exposures or tweaking their traditional holdings to better suit changing conditions.<\/p>\n One team that may be overlooked in this World Cup (post its finish) is Morocco. Yet, as at the end of the quarter finals, the team has conceded fewer goals than any other nation (just one, in fact). This is a remarkable feat when you consider that the other teams competing for a spot in the finals includes France, Croatia, and Argentina. While the team has operated in a very compact manner, it is the defensive component of Morocco\u2019s strategy which has received the highest praise in terms of its quality and resoluteness.<\/p>\n Much like with the formation of a successful football team, when considering portfolio construction and strategy, one\u2019s defence (or in this case, its fixed income component) is crucial. This asset class has long been acknowledged as a core component of a balanced portfolio, providing defensive characteristics and diversification benefits to investors. The defensive characteristics of a fixed income allocation can be explained by its relative stability potential \u2013 in this case, when a bond reaches maturity, the holder can typically expect to be repaid the face value of the bond (depending on issuer creditworthiness). Naturally, this makes bonds attractive to investors seeking increased stability of capital.<\/p>\n A final thought on what some of the teams from this World Cup could teach us about investing is the importance of controlling one\u2019s emotions. For example, in looking at Morocco\u2019s impressive win over Spain in the penalty shootout, it was evident how calm the majority of Morocco\u2019s players were in comparison to Spain, which was unable to net a single penalty. A similar picture of calm was painted again with the Croatian team which, thanks to calm and focused penalties, has managed to progress to the knockout stages for two World Cups in a row.<\/p>\n Similar with investing, emotions such as fear and excitement often lead investors to waiver from their designated strategy, leading to detrimental returns. Instead, a better option may be to leave emotions on the sidelines and remain invested in a well-diversified portfolio.<\/p>\n As the World Cup can teach us, the most important factors when considering portfolio construction include diversifying one\u2019s assets to help alleviate the impact of market shocks, while also remaining level-headed and flexible enough to recognise \u2013 and respond to \u2013 changes. Finally, and perhaps most crucially, investors should ensure their defensive allocation is not overlooked and of high enough quality to help them to achieve their overarching\u2026goal.\u00a0<\/em>(Sorry \u2013 had to be done!)<\/p>\n","protected":false},"excerpt":{"rendered":" The World Cup is in full swing, and on the field remain the final four teams \u2013 one of which will lift the golden trophy…<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[4],"tags":[],"class_list":["post-1116","post","type-post","status-publish","format-standard","hentry","category-innov8ions"],"_links":{"self":[{"href":"https:\/\/www.innov8fs.co.za\/blog\/wp-json\/wp\/v2\/posts\/1116","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.innov8fs.co.za\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.innov8fs.co.za\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.innov8fs.co.za\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.innov8fs.co.za\/blog\/wp-json\/wp\/v2\/comments?post=1116"}],"version-history":[{"count":1,"href":"https:\/\/www.innov8fs.co.za\/blog\/wp-json\/wp\/v2\/posts\/1116\/revisions"}],"predecessor-version":[{"id":1118,"href":"https:\/\/www.innov8fs.co.za\/blog\/wp-json\/wp\/v2\/posts\/1116\/revisions\/1118"}],"wp:attachment":[{"href":"https:\/\/www.innov8fs.co.za\/blog\/wp-json\/wp\/v2\/media?parent=1116"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.innov8fs.co.za\/blog\/wp-json\/wp\/v2\/categories?post=1116"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.innov8fs.co.za\/blog\/wp-json\/wp\/v2\/tags?post=1116"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}Adapting to changing conditions<\/strong><\/h2>\n
Fortifying your defence\u2026and emotions<\/strong><\/h2>\n
Scoring goals<\/strong><\/h2>\n