How to build a gold-medal investment portfolio

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Enjoyed the Olympics? The women's gold-medal hockey team provided the more heart-stopping fan experience, but it was the men's determined, low-risk, disciplined performance that carries the best investment lessons.

The men's team was built to win, nothing else. The coaching staff looked at the competition, the Olympic-sized rink and the potential players, then designed a defensive strategy that – while not the most exciting – had the highest probability of success.

This is an excellent template for investors and offers the following four important lessons in portfolio construction.

Stick with the plan: The men's coaching staff recognized the larger ice surface would put stress on the Canadian defence. As a result, the team was built around a defensive strategy emphasizing back-checking and discipline.

The lesson for investors here is to think carefully about a game plan and build portfolios accordingly. There is no place for yielding to temptation or impulsiveness. As the hockey team proved, discipline is key.

Quality: It's self-evident that only the NHL's best get to play for Canada but too often, investors fail to apply the same logic to their investments. The Olympic team featured the players with consistent, long-term track records of excellence, with no exceptions.

In the investing world, the S&P Quality Ranking System for equities puts the same emphasis on long-term performance. S&P's proprietary model rewards stocks representing long term histories of steady profit growth and dividend increases.

The benefits of quality are as clear in equity markets as they were on the ice. Over the past five years, the S&P High Quality Index (the highest rated stocks by the S&P quality criteria) has outperformed the S&P 500 by more than 30 per cent.

The biggest advantage to high-quality portfolios is trust. Coach Mike Babcock didn't bench Jonathan Toews after a bad shift, and investors in high-quality stocks don't have to worry about selling them after a bad quarter. Take Bank of Nova Scotia, for example: During the financial crisis, the bank's dependable earnings history gave investors faith that the stock would recover. The result was a 163-per-cent return over the past five years.

No mistakes: If only five of six players on the ice are paying attention, the sixth can get your team beaten. The same logic holds for portfolios. Most investors have had the experience of one cratering investment torpedoing the performance of a portfolio that was otherwise rock solid.

Investors should avoid the "well, my investments are mostly conservative so I can afford to take this microcap flyer" impulse. Every investment has to contribute to the plan in the same way the country's top hockey players committed to the team's grinding, non-telegenic, defensive strategy.

The last line of defence: Even with the emphasis on team defence, the gold medal would not be in their rightful Canadian hands without the heroics of goaltender Carey Price.

The implication for investors is that, no matter what the aggregate quality level of portfolio holdings, a last line of defence is needed for the market equivalent of a bad bounce of the puck. In other words, always hold some government bonds.

The benefits of a strong fixed-income defence are most evident during volatile equity markets. In 2011, for example, a portfolio of 60 per cent S&P/TSX composite and 40 per cent iShares Dex Universe Bond Index Fund (Canada) outperformed a 100 per cent domestic equity portfolio by almost 7 per cent.

The Canadian strategy – consistency, defence first, combined with opportunism by the highest-quality players on the planet – could have been designed by Warren "Rule No. 1: Don't Lose Money" Buffett himself.

The results were also Buffett-like; no blowouts, no losses, just a steady stream of low-margin victories analogous to outperforming the market by just a little bit each year. And the gold medal.