Investment tips from the Melbourne Cup

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The Melbourne Cup is the race the stops a nation — a chance to dress up, let our hair down and enjoy the spectacle of some of the world’s best horses competing for glory. But does Australia’s most famous horse race have anything to teach investors? Here are three tips to help you sort the winners from the also-rans both on and off the track.

Tip 1. Study the form

Predicting the winning horse on Melbourne Cup day isn’t easy — but without doing some homework, it’s almost impossible. The better informed you are, the better your chances will be.

That doesn’t just mean checking out how each horse has run in the past. To find a winner, you’d also have to look at their current form and consider how well they can cope with conditions on the day, from the weather, to the draw and the handicap carried by each horse.

The same thing applies to your investments. By understanding the strengths and weaknesses of different investment options — from term deposits to managed funds and shares — you can start looking investments that fit your unique goals. Because building a great investment portfolio, isn’t simply about picking winners, it’s about getting the right balance of risk and return for you. And expert advice can make all the difference.

At 3,200 metres, the Melbourne Cup is one of the longest races in Australia — so it isn’t a place for sprinters. An early lead counts for nothing if your horse runs out of steam before the finish line.

In the same way, it makes sense to choose investments that match your investment timeframe. For example, when you’re younger, you may want to put your super into investment options with history of higher growth over the longer term, such as shares. But if you’re retiring soon, or saving for a short-term goal, you may prefer investments with lower levels of risk and return.

Tip 3. Spread your risk

While 24 horses will be vying for this year’s Cup, there can only be one winner. So your chances of forecasting the first place-getter are 1 in 24, or just over 4%.

But now imagine you could have 6 picks, instead of just one. That would increase your chance of a win to 25%, and your chances of a place to around 60%.

That’s the principle of diversification in action. By spreading your investments across a range of different assets, you can potentially lower your overall risk and increase your chances of a winning performance, year after year.

Disclaimer

This document has been prepared by Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468 (Colonial First State) based on its understanding of current regulatory requirements and laws as at 4 November 2013. This document is not advice and provides information only. It does not take into account your individual objectives, financial situation or needs. You should read the relevant Product Disclosure Statement available from the product issuer carefully and assess whether the information is appropriate for you and consider talking to a financial adviser before making an investment decision.

Copyright © 2013 Colonial First State Investments Limited.

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