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Sailing into investment winds.


My sailing buddies have a saying – “You can’t control the wind. You can only adjust your sails.” Nice segue to the investment world.

It’s relatively easy to sail when you are going in the same direction as the wind; the sails catch the wind and push the boat forward. As long as the wind is blowing in the direction that you want to travel, it’s easy. Aim at the desired spot on the horizon and steer straight. Similarity, in the investment world, in a bull market it takes little skill to invest – a rising tide lifts all boats.

Sailors also say: “You can get to anywhere you want to go, but almost never in a straight line.”

The wind is rarely steady and when it changes direction or strength, the sailor must adjust the sails to progress toward the point on the horizon. Tacking or zigzag back and forth across the wind shifts the sail from one side of the boat to the other. Because speed, performance, and control are influenced by the amount of sail area exposed to the wind, sometimes the sailor has to stray slightly off course in order to safely progress to that point on the horizon.

The investor too faces increased complexity when ‘investing into the wind’. When investment markets change in direction or strength, investors are reminded about waves of volatility and may find themselves taken off-course. As sailors recognize they can’t control the wind, investors too recognize they can’t control returns. But, as the sailor can navigate to avoid capsizing, the investor can manage the amount of risk taken. For an investor to progress toward their objective on the horizon, even with ‘head-wind’ investment conditions, the mandate is diversification. Diversification ensures benefit from long-term trends but reduces short-term volatility.

Asset allocation and broad, global diversification complemented by shorter-term tactical intervention (asset mix management) to broaden opportunities for returns and manage risk relative to the long-term asset allocation (the point on the horizon) should be the investors focus. The investor may have to steer back and forth by adding or reducing exposures to various asset classes … in small increments.

When the wind forms whitecaps, smaller boats become unstable and the novice sailor should not be on the water alone. And when the storm hits, the fair weather sailor / investor needs a captain with experience. Not just to survive the storm but to ensure progress to that point on the horizon.

A less well known sailorism, and my personal favorite: ‘The next best thing to owning a sailboat is having a buddy who owns a sail boat’.

Originally published in the Business Thompson Okanagan news, July 2008.

Doug Cronk CFA is Manager, Investments for a Canadian Pension Fund.

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