I had the pleasure of spending most of November in a small fishing village on the Irish Riviera.
The Irish economy has been growing strongly for many years. At the end of 2004, the editors of the Economist magazine voted the country that has often featured as the butt of many silly jokes as the best place to live and work out of 111 countries.
During my stay, I was due to meet some relatives at a pub called Jim Brown's one evening. I was unable to find the place in the village's one-mile-long main road, and eventually had to ask someone for directions.
The reason I got lost was that the two signs above the establishment read "Imperial Hotel" and "McCarthy's Pub", with "J. Brown prop." in tiny letters below them. It reminds me of the disclaimers that are carried by some investment products.
When the time came for my next rendezvous, I smartened up and asked for a landmark close to the Clock Pub, which was the meeting place of choice. It seemed a good idea to get the general vicinity right this time, especially as the temperature fell to three degrees that evening. I was told that the place in question was just down the road from a pub called Kevin Powers.
However, I was not told that the Clock was now called the Gate and that Kevin Powers sold up ages ago and that his pub had changed its name to The Blackwater Inn.
So, a word of advice when you are looking for a place in Ireland: Ask, in a non-sarcastic tone, if it has changed its name in the past 50 years.
Wandering around in single-digit temperatures did not spoil the trip at all. In fact, I had to admit that the fault lay with me for not asking the right questions in the first place.
Most people ask the obvious questions when they are considering adding an investment to their portfolio - for example, questions about the costs involved, the risks attached and the investment's growth prospects. Occasionally, investors may remember to ask whether they will incur any costs if they change their mind and want to liquidate at any point.
Investors often overlook to ask another, equally crucial question: What quality will this investment bring to my portfolio as a whole?
The answers should reveal two kinds of information:
- You want to know what level of growth, income or security (reduction in risk) the investment may bring to your portfolio. Here are some examples of what I mean:
* Adding some money market investments to a portfolio full of growth stocks with high price/earnings ratios may lower the overall volatility of the portfolio.
* Adding a highly regarded fund manager's growth fund to a low-cost index portfolio will cost a little more and may improve the likelihood that you will beat the market, but it will not substantially change your risk to the overall equity market.
* Adding BHP Billiton shares to a portfolio with a large holding in Anglo shares will not materially alter the risk of the portfolio to a decline in commodity prices or movements in the rand, even though the currency and commodity mixes of the respective shares are somewhat different.
- You want to find out what economic factors drive the investment's behaviour, and ensure that your entire portfolio does not become overly dependent on one driver - for example, the level of the rand or stellar performance by the stock market. (Those of you who scored high marks in my recent quiz on risk will no doubt ignore the advice in this paragraph.)
There are two reasons why it is so important to consider the quality that an investment will bring to your portfolio. Firstly, it is costly and complicated to have too many "duplicates" in your portfolio. It makes it difficult to understand why your portfolio is performing in a certain way.
Secondly, the future rarely works out as we think it will and investment indicators are always surprising us. A well-structured portfolio means that parts of your portfolio are catching the action, while other parts are helping you sleep at night when the unthinkable is happening.
Liberty International is a share that illustrates the concept of adding something unique to a portfolio. Unlike many other shares with offshore exposure, it is not dependent on the commodity cycle, which itself has an impact on the behaviour of the rand.
Liberty's performance depends on the property market in the United Kingdom - the retail property market in particular. It pays a reasonable dividend and its share price behaves independently of the overall movement of the JSE Securities Exchange.
The next time you are considering adding an investment - whether it is a single share or an investment product - to your portfolio, be sure to ask what quality it will bring to your portfolio as a whole. If you minimise the "clones", you are likely to make your life simpler - and you will also sleep better at night.