Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 54

Picking winners: the origins of the specious

“Investing should be more like watching paint dry or grass grow. If you want excitement, take $800 and go to Las Vegas.” Paul Samuelson, Nobel Prize for Economic Sciences, 1970

If we believe the financial press, superannuation has been wrongly turned on its head. Every week in our highest profile financial newspapers and magazines, we have headings like: “Exclusive fund superstars - investment tips from top managers.”  It’s as if long-term investors need to respond to daily announcements and behave like traders.

Samuelson reminds us that when saving for retirement, investors should expect some level of boredom in their investment returns. Warren Buffett has said that he buys investments "on the assumption that they could close the market the next day and not reopen it for five years."

The superannuation goal is to have an adequate balance after your working life to live according to your expectations, but not worry about the markets every day.

How best to achieve this goal has led to debates around fundamental principles such as: the robustness of current asset allocation techniques; use of optimisation models; appropriate risk levels; the definition of risk; passive versus active management - to name a few. The fact such debates continue with rigour also shows that a lot of the ‘principles’ we take for granted should be challenged. Different perspectives should be encouraged and examined.

Focus on avoiding losers, not picking winners

One traditional focus is on picking winners as opposed to avoiding losers. The former makes for great news articles (when someone does get it right) whilst the latter is more akin to Samuelson’s quote.

Have you ever noticed the language of English Premier League football managers when interviewed post match? Those challenging for the title will refer to ‘points lost’ or ‘given away’ as critical, acknowledging that, as soon as too many points are lost throughout the season, the title chase is effectively over. For those at the bottom of the table, there is also the expression of the need to achieve, say, 41 points to stay in the League, i.e. an aspirational target.

This illustrates something that most of us know instinctively when investing and is routinely mentioned as a behavioural preference. If asked: “would you give up some upside to protect downside?”, most answer “yes”. Numerous behavioural finance studies show that we dislike incurring losses far more (by around a factor of 2) than we ‘enjoy’ making profits. Yet it is questionable if this philosophy is accurately reflected in current asset allocation and risk management practices.

The one thing we can say definitively on our superannuation journey is that during the intervening years from commencement until retirement, there will be ‘up’ years and ‘down’ years for anyone investing in other than cash.

Superannuation needs to preserve capital

It is our belief that the primary focus of the wealth management industry has changed from conservation of capital, with the ability to take advantage of compounding and long term horizons as core principles, to that of picking winners in the guise of various ‘risk adjusted’ frameworks.

But there should be more focus on minimising the ‘points’ lost rather than maximising the gains required. The reason is clear. Upon incurring a market loss a larger return is required simply to get back to where you started. As a simple example, consider the following two investors, both investing $10,000 at the end of May 2000.

  • Investor 1 invests $10,000 in the ASX 200. Here the volatility is approximately 12% per annum.
  • Investor 2 is more conservative and invests $10,000, 40% in the ASX 200 and 60% in cash. Here the volatility is approximately 5% per annum.

What were their experiences like?

Both investors had a good time up until September 2007. At this point, they were fine, with about $30,000 and $20,000 in capital for Investors 1 and 2 respectively. Then disaster struck. Investor 1 was hit with a drawdown period that lasted from September 2007 until January 2009, culminating in a total loss of 49%. Meanwhile, Investor 2 did not escape unscathed. A total loss of 17% was accumulated from September 2007 until January 2009. In order to return to the equivalent capital balance prior to September 2007, the total required return for Investor 1 was 92% while Investor 2 was 22%.

We assume for this illustration that both investors kept the faith and did not change their asset allocation.

How long did it take these investors to return to break-even? For Investor 1, it took six years to recover. For Investor 2, it took two and a half years. As an aside, by the end of January 2014, the annual realised return since May 2000 for Investors 1 and 2 was 5.5% and 4.7%, respectively. The realised annual volatility over the (nearly) 14-year investment was 13% and 5%, respectively.

This example illustrates something we all know. As the loss increases, the return required to retrieve your capital increases exponentially.

More importantly, neither of these relationships is linear and neither bears any relationship to the ‘risk’ that, as measured by volatility, these investors suspected they were taking.

Furthermore, the assumption that both investors stayed with their initial allocation is an optimistic one. There is a high likelihood they would have changed their allocations, especially away from equities after such a scare, causing the recovery time to be even longer.

Whilst ‘value add’ in the form of picking winners is admirable and part of every participant’s core belief, it appears that, in the pursuit of validating this quest for long term, consistent alpha - even if it is risk-adjusted - the other principles of downside risk mitigation and the preserving of capital become diluted, or lost.

We suggest that a focus on minimising disasters and downside, whilst clearly not as exciting as picking winners, is a better goal and results in an improved, long-term outcome for the individual, as well as a less hair-raising experience for all.


Dr Leah Kelly and Paul Umbrazunas are Principals of AccumNovo Financial Group.


Bill & Ted’s (Not So) Excellent Sequencing Adventure

A better approach to post-retirement planning

An insider's view of the last financial crisis


Most viewed in recent weeks

How to enjoy your retirement

Amid thousands of comments, tips include developing interests to keep occupied, planning in advance to have enough money, staying connected with friends and communities ... should you defer retirement or just do it?

Results from our retirement experiences survey

Retirement is a good experience if you plan for it and manage your time, but freedom from money worries is key. Many retirees enjoy managing their money but SMSFs are not for everyone. Each retirement is different.

A tonic for turbulent times: my nine tips for investing

Investing is often portrayed as unapproachably complex. Can it be distilled into nine tips? An economist with 35 years of experience through numerous market cycles and events has given it a shot.

Rival standard for savings and incomes in retirement

A new standard argues the majority of Australians will never achieve the ASFA 'comfortable' level of retirement savings and it amounts to 'fearmongering' by vested interests. If comfortable is aspirational, so be it.

Dalio v Marks is common sense v uncommon sense

Billionaire fund manager standoff: Ray Dalio thinks investing is common sense and markets are simple, while Howard Marks says complex and convoluted 'second-level' thinking is needed for superior returns.

Fear is good if you are not part of the herd

If you feel fear when the market loses its head, you become part of the herd. Develop habits to embrace the fear. Identify the cause, decide if you need to take action and own the result without looking back. 

Latest Updates


The paradox of investment cycles

Now we're captivated by inflation and higher rates but only a year ago, investors were certain of the supremacy of US companies, the benign nature of inflation and the remoteness of tighter monetary policy.


Reporting Season will show cost control and pricing power

Companies have been slow to update guidance and we have yet to see the impact of inflation expectations in earnings and outlooks. Companies need to insulate costs from inflation while enjoying an uptick in revenue.


The early signals for August company earnings

Weaker share prices may have already discounted some bad news, but cost inflation is creating wide divergences inside and across sectors. Early results show some companies are strong enough to resist sector falls.


The compelling 20-year flight of SYD into private hands

In 2002, the share price of the company that became Sydney Airport (SYD) hit 80 cents from the $2 IPO price. After 20 years of astute investment driving revenue increases, it sold to private hands for $8.75 in 2022.

Investment strategies

Ethical investing responding to some short-term challenges

There are significant differences in the sector weightings of an ethical fund versus an index, and while this has caused some short-term headwinds recently, the tailwinds are expected to blow over the long term.

Investment strategies

If you are new to investing, avoid these 10 common mistakes

Many new investors make common mistakes while learning about markets. Losses are inevitable. Newbies should read more and develop a long-term focus while avoiding big mistakes and not aiming to be brilliant.

Investment strategies

RMBS today: rising rate-linked income with capital preservation

Lenders use Residential Mortgage-Backed Securities to finance mortgages and RMBS are available to retail investors through fund structures. They come with many layers of protection beyond movements in house prices. 



© 2022 Morningstar, Inc. All rights reserved.

The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.