Circa 2009 I jumped off a helicopter on a hilltop feature somewhere in Afghanistan. I was weighed down by heaps of gear. I was met on that feature by a few characters carrying what appeared to be a small backpack each, which they proceeded to nimbly throw into the back of the departing aircraft. We were smiling, covered by some fine dust that would likely cake us for the next 6 or more weeks. I looked up and said, “high speed, low drag”.
What is high speed low drag?
In the military this is a term that highlights the need for only packing essential items to complete the mission. This means that once you clearly understand the mission and what it entails you find specific gear. The primary consideration especially when you must carry said gear is weight. Weight dictates how far you can travel, your speed, your ability to operate carrying the weight etc. So, you see that by carrying only essential equipment you increase the likelihood of mission success.
Like planning a military mission, developing a financial plan, and clarifying financial goals generally involves trying to understand when you will be ready to retire, or draw a passive income, or pay down debt etc. In framing the first two questions of when you can retire or draw a passive income, the ‘high speed, low drag’ analogy manifests. By understanding your time limits, cashflow, and your tolerances you can quickly identify investments that give you the highest likelihood of success. This allows you to weight your investment portfolio towards those strategies.
Weighting in investing
Weighting is the amount of each asset type you decide to introduce to your portfolio. An example of weighting is the default strategy in a superannuation fund. It is likely to have exposure to cash, fixed interest, property, alternative assets, Australian shares, global shares, private equity etc. Within each of these there are sub investments – think global shares concentrated on technology, or fixed interest in Europe. The list is endless. Alongside this you must understand that each of these asset types has features, like liquidity, fees, risks, and volatility. Now you start to understand how each of these would better allow you to achieve your goals – or if indeed they are just an added weight for no benefit. As an example, if you have 20 years to retirement, then cash investments in superannuation may likely to be best invested against high interest debt rather than as part of your retirement portfolio where it may provide a buffer against volatility but has no benefit to you now.
How do I decide on my weighting?
This is tricky. No two people will agree on a portfolio weighting. As an example, you may see the return on your investment property with no debt is $9,000 per annum – so on that basis if you have 6 of these, you are on track to building a property weighted portfolio to derive passive income based on your plan. Your neighbour has a similar property with debt and is negatively geared, costing $4,000 per annum. Based on timeframes, property types and your own cashflow you will both likely have different opinions on a property portfolio. Weighting dictates what you will carry, so you want to ensure that the weight is critical to what you want to achieve. In this example you and your neighbour have similar investments however based on timeframes and the above figures it is likely your neighbour won’t be achieving their financial goals.
Time is key to understanding your ability to succeed. If you have all the time in the world then most things are possible; however, we only have a finite time to prepare and execute a plan. Finite time is a sliding scale of months to decades. Weighting and time dictate how likely you are to succeed. If you invested in a 100% cash portfolio you want to have a lot of time to generate the returns you anticipate. So as time starts constricting you need to start looking at altering your weighting if you want to achieve mission success.
High speed, low drag
Like weighting, there is no use in comparing how much drag someone else is carrying – the focus must be on reducing your own drag by shedding underperforming assets. As per my military example above, my backpack wearing colleagues appeared to have high speed, low drag however if I adopted their tactics I would have failed in my mission. Our timeframes were different, they were there overnight, and I had to survive 6 weeks. My backpack was larger and appeared to have more drag but was fit for purpose.
Not everyone’s goals are the same, therefore not everyone’s financial plan is the same.