How to embrace uncertainty in your portfolio

Humans are not designed to like uncertainty...or investment markets. That's because just like life in general, markets are full of uncertainty. We didn’t expect the COVID pandemic. Nor can we predict the next geopolitical event. We can’t even know for certain that the rate hikes from the RBA are definitely over (though consensus suggests they are - hopefully).

Uncertainty creates stress. A study found psychological uncertainty causes our brains greater stress than physical pain. It doesn’t bode well for investing, however, with the same study also finding that when you are more certain of a negative result, you actually become less stressed.

So, how do you apply that to your investments? You can either accept more negative outcomes (not particularly useful), or build a portfolio that factors in uncertainty through diversification. 

MLC Asset Management’s Anthony Golowenko could be a case study of how it might work.

Golowenko is sanguine about uncertainty. In fact, he embraces it and uses it to create diverse portfolios.

“There’s a whole lot of uncertainty. Embrace it and actually incorporate more resilience into your portfolio construction,” says Golowenko.

He argues that, whether six months ahead or over a multi-year period, there’s very little anyone can know with certainty. Knowing that, you should consider the potential distribution of outcomes and ensure diversity and resilience across your portfolio.

In this episode of The Pitch, Golowenko discusses his investment philosophy and what he sees in markets. He also shares his tips for investors building their portfolios—enjoying the ride is a big part of this.

This interview was filmed on Wednesday, 3 April 2024.

Edited transcript:

Can you describe your investment philosophy and approach?

Well, I think it really starts with an understanding of what do you really know with certainty and investment markets. If it's six months or 12 months or a multi-year period, you really don’t know much with certainty. So acknowledging that uncertainty, thinking more about a potential distribution of outcomes and building portfolios with diversity and resilience for our clients.

What have been the biggest influences on your approach?

I think that exact point [acknowledging uncertainty].

If someone had said four years ago, “You're going to have a global pandemic, the war outbreak, and how quickly that tipped with Russia and Ukraine”. If someone had said, “Taylor Swift is going to do a billion-dollar tour with three-and-a-half-hour shows and 10 eras”, it's a very, very low probability. And as much as there are experts who espouse a view with really high conviction, acknowledge that there's a whole lot of uncertainty, embrace it and actually incorporate more resilience into your portfolio construction.

Turning to markets, what are you seeing in markets today? What do investors need to keep in mind?

It has been quite incredible over four years.

A wild ride of pandemic stimulus, extraordinary conventional and unconventional approaches, and now the brakes have been rapidly applied.

We seemingly are at a point approaching equilibrium, and we just don't see that there's a need for these rapid-fire rate cuts. We're at a point of equilibrium through that.

Valuations are a bit elevated, and we just encourage an awareness of that, particularly with things like global equities and just build your portfolio with that knowledge.

Based on your experience and learnings, what advice do you have for investors starting out to build their portfolio?

I think simple things like be humble. Learn as much as you can. For those investors who give you the time of day, seek them out and really be clear in thinking of an investment view, a rationale, thinking about both the upside and downside, a full range of opportunities. But I would say enjoy the journey, enjoy the ride, and yeah, who doesn't love investing?

Learn more

MLC Asset Management's portfolios combine their best thinking on asset allocation with a disciplined investment process - developed over 35 years - that optimises returns and reduces risk. For further information, please visit their website.