VOLATILITY is similar to bouncing on a trampoline - to get higher into the air, you need to jump harder - forcing the trampoline down more so that it can propel you upwards when it rebounds. The downward movement leads to the upward movement. Different types of investments deliver both varying amplitudes of return (high bounce), and varying frequencies of return (consistent air time).

Understanding this relationship allows you to optimise the effectiveness of your portfolio return.

As a child, I found that the annual tennis championships at the Good Hope Country Club were a big deal. Generations of family sporting reputations were at stake. So, Mum and Dad versus Kath and Phil Williams in the mixed doubles finals was a nail-biting affair.

Dad is a gifted sportsman, and could be counted on to carve up the opposition with piercingly accurate, blistering forehand winners. But rough patches are part and parcel of playing sports. Sometimes he'd just keep missing those lines, at which point Mum would step in and reliably knock the ball back till his form returned. Later, back home on the farm, after replacing the trophy in its rightful place above the fireplace, she explained to me: 'Pips, every now and again even the best players need to be carried for a bit.'

Imagine you are a trampoline co-ordinator who has been given the dual objective of optimising: a) the number of trampolinists simultaneously in the air, and b) consistently getting as much combined lift as possible.

You might start by instructing a trampolinist to jump fast, and softly. While this jumping pattern would put her more frequently in the air (objective a), you'd quickly realise that she would still only be in the air half the time. So you could introduce another trampolinist bouncing at the same speed, but exactly out of time with her, whose jumps are perfectly 'uncorrelated''. In this way you'd always have one in the air (objective a). Hmm, but you'd still not be getting much total net lift.

So you could introduce a third jumper with a powerful bounce, who propels himself high into the air with excellent lift. This jumper will compensate for the fast-soft jumpers' lower height by amplifying the total combined lift each time he's airborne (objective b). In turn, although the requisite depth of his drop reduces his air time, the fast-soft jumpers would help compensate for these deep drops by themselves being frequently in the air. Like Mum did with Dad, they carry him when he's down.

Similarly, in the investment world, different types of investments deliver both varying amplitudes of return (bounce height), and varying frequencies of return (air time). And just like the trampoliners, the timing of their returns may be different, or uncorrelated. For example, a drought in Brazil would cause the commodity price of coffee to rise (supply shortage), while pushing down the share price of Java Coffee Hut Company (higher coffee prices eat into corporate profits).

Although all asset classes move cyclically up and down, their frequency of returns are reliably consistent on a statistical basis. For instance, on a monthly basis, equity markets are positive 62 per cent of the time. This means you should expect 62 of any 100 months to be positive: and you should equally expect 38 to be negative - even Dad's excellent forehand can't hit a winner every time.

The spectrum of frequency of positive return varies across different asset classes. At one end of the scale, certain hedging strategies are positive in 90 per cent of months (fast, soft jumpers), while other asset classes are up less than half the time (strong, high jumpers).

This up/down movement is called volatility. Volatility is similar to bouncing on a trampoline - to get higher into the air, you need to jump harder.

Conceptually, a huge portfolio of hundreds of trampolinists could be lined up, bouncing away with diversified, uncorrelated jumping rhythms. Since clearly there's a trade-off between the number of trampolinists simultaneously in the air and getting as much combined net lift as possible, a truly skilled maestro portfolio trampoline co-ordinator could adjust the mix of uncorrelated bouncing patterns depending on the relative importance to you of consistency of air time, or of net height.

Similarly, the objective of excellent portfolio management is to optimise the trade-off between:

• the number of assets simultaneously positive (combined air time - or 'risk'), while
• consistently getting the highest combined returns as possible (net height - or 'return').

The solution is not simply to search for investments that have the greatest probability of positive returns - because although the returns are positive, they are likely smaller (soft, fast jumpers). This is because volatility is the flip-side of positive return. There is a trade-off at stake: you want some of your investments to be big jumpers, with higher volatility, sacrificing frequency of positive months so they can lift overall return.

Uncorrelation explains the relative differences in co-ordination of the strength and direction of movement between variables, whether it be trampolinists or investments. Orchestrating uncorrelation is key to winner portfolio management. Deciding whether to prioritise frequency of positive months, or to prioritise more volatile big hitting returns, depends on the amount of time you have before you need to draw cash from your portfolio.

For instance, a retiree relying on a steady portfolio income stream would need to own more assets which consistently deliver positive returns. A successful lawyer with many good career years ahead could - and should - afford to include more big jumpers in his or her portfolio because a steady cash stream is not a priority right now.

Portfolios need elements of both Mum and Dad. Your investment results are made more robust by ensuring there are sufficient elements in your portfolio to reliably carry the game by consistently putting the ball back in play when times are tough. Then you can calmly let the match unfold without nervously agonising over what will happen when your star player inevitably, albeit temporarily, goes off the boil.

The writer is CEO and founder of The Philippa Huckle Group.

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