Asset Allocation and Trivial Pursuits

by Alexander Beard, on Jan 14, 2016 5:19:02 AM

DSC_7239This Christmas I bought Trivial Pursuits as a gift to all the family. It was a great way to switch off from work, challenge the old grey matter and feel smug - because it was one game I could actually beat the kids at (unlike their games consoles). On my return to work in January I realised that this enjoyable general knowledge game could also provide a useful example for explaining part of our investment philosophy, due to a number of resemblances with our Asset Allocation process.

For those of you who are not familiar with the board game, each player has a circular piece of plastic which you move around the board with a roll of the dice. Your circular piece has space for 6 individual segments.  When you roll the die, land on the right square and get the question right, you collect a segment. There are six different colour segments to collect, each colour representing a different field of knowledge, such as History, Science, Entertainment etc.  You need to have all the colours before you proceed to the centre of the board for the killer question to win the game – a question which could be on any of the topics.

The first resemblance is purely aesthetic. This circular piece with its coloured segments is reminiscent of our Asset Allocation pie charts, a complete circle with segments of different colours to represent each different asset.  My first observation is that you can’t win Trivial Pursuits by knowing only one topic.  You end up with only one segment in your piece and miss out all the other colours.  With investments, it is easy to get side-tracked because of a detailed knowledge of one particular area.  Our Asset Allocation process considers 15 key areas of investment and compares them all on an equal footing before building portfolios.

The second resemblance is that there is an element of chance – each player rolls the dice, after all. But the dice only has six sides, so with each roll you know the number will be between 1 and 6.  With investment portfolios, it is possible to assess risk and position the assets so that you can be reasonably certain of the range of possible outcomes.  A risky portfolio will have many more potential outcomes than a cautious one.  This is a much more controlled process than perhaps many people imagine, but we can’t escape the fact that there will always be an element of chance.

The third resemblance is that you can’t know everything in Trivial Pursiuts. You can’t predict what questions will come up when you draw the card, and you will not get every question right.  Investment portfolios are arguably even more difficult, because the Asset Allocation is positioned to best handle the future, and nobody can predict the future with accuracy.  Indeed, a key element of building investment portfolios is the acceptance that you will get aspects of it wrong.  But as long as you have enough different segments in your circle you will make progress, in other words diversification is key.

My final comment is about a key difference between Tivial Pursuits and our investment process. With the board game it takes a couple of hours to ask a small number of questions.  I am pleased to say that our system is computerised, allowing us to ask nearly 100,000 questions of the investments simultaneously, considerably more than an individual could handle.  OK, It’s not as entertaining as a game with the family, but it does bring a certain amount of pleasure, all the same.

Andrew Moore
Investment Director and Partner