Savvy investors spread their risk across a number of different areas, so that their overall portfolio can remain on a relatively even keel despite the short-term fluctuations of individual investments.

Check your next superannuation statement and you’ll see the overall fund (which might be valued in the billions) will be split across a range of investments: cash deposits, bonds, property, Australian and overseas shares. Often they’ll refer to these as “defensive” items (low return, low risk), and “growth” items (higher return, higher risk).

So what’s this got to do with the punt?

Well punting is also an investment, and that means diversification is a principle you should embrace.

Like more traditional investments, successful punting is a long-term proposition. You need to be able to ride out troughs and peaks in performance in order to realise overall gains.

Those troughs will be more volatile if you’re only following one approach.

However if you are diversified it will mean that if one approach is experiencing a downturn in performance, it should be balanced out elsewhere.

Take the following example, showing the theoretical performance of four different systems over the same period:

System

Opening Bank (units) Profit / Loss (units)

Closing Bank (units)

System A

100

23

123

System B

100

10

110

System C

100

3

103

System D

100

-25

75

 

Let’s say you had a punting bank of $20,000 and employed a 100 unit bank over this period.  The simplest approach would be to choose a system and dedicate the whole bank to it.  If you were on System A, your $20,000 would have become $24,600.  Happy days.

System D, however? Your $20,000 is now $15,000.

Systems B and C both fall in between.

It’s easy to say “just put the whole lot in System A”, but as we all know, past results are no guarantee of future performance, and we don’t have a crystal ball!  All gambling systems (including long-term successful ones) go through short-term downswings at times before picking back up and reverting to a long-term average.  It’s just the way maths works.

Over the next short-term period, the performance of Systems A and D may well reverse.

So assuming all approaches have a similar long-term record of profitability, a diversified portfolio would utilise all approaches with a $5,000 bank in each (which means betting $50 per unit instead of $200 in the all-in scenario).

Over the above period, this would make your closing bank $20,550.  Clearly not as attractive as the ‘purely System A’ approach, but a positive net result balanced out across all the results and avoiding the large downturn that could have come if you followed only System D.

Critically, you’re equally protected when the performances inevitably switches around. This allows you to ride out short-term swings and continue to operate and succeed in the long-term, which after all, is our primary punting goal.

2 COMMENTS

  1. Agree, watch for positive correlation though, e.g. if System A and B are highly correlated you may want to dump one and examine C or D for negative correlation to your chosen selection of A and B. Use less capital to achieve diversification.