the game of investing
is a lot like investing, and I'm talking about more than the thrill of victory
and the agony of defeat.
Let's start with the importance of a diversified portfolio.
Championship teams do not depend on one high-priced player. Instead
they rely on the contributions of an entire roster, regardless of
how large or small a part each plays.
When my favorite team's quarterback
crumpled to the turf in a recent game, I couldn't help but ponder
the impact of a potentially significant injury on the team's playoff
chances. Just as with injuries in sports, there will be setbacks
in investing, too, whether it is a bear market, interest rate volatility
or just the inevitable incorrect investment decisions. But just
as a well-rounded team, with a balanced attack, mitigates the risk
of losing the wrong player to injury, a properly diversified portfolio
helps weather the storm without compromising long-term investment
An age- and risk-appropriate portfolio will keep you
on track to reach investment goals in the face of short-term setbacks.
Most important is asset allocation, which determines 91 percent
of an investor's total return. This is a rather fancy term to describe
the process of divvying up your money between different investment
classes, such as stocks, bonds, real estate, commodities and cash
investments. An initially aggressive allocation should give way
to a more-conservative approach as retirement, college tuition or
whatever use the money is intended for, approaches.
Disciplined saving and investing are as important to reaching
financial goals as blocking and tackling are to success on the gridiron. These
are truly fundamental behaviors, such as "paying yourself first" by
having money direct deposited from your paycheck into a savings or mutual fund
account. Also important are the use of tax-advantaged accounts such as 401(k)s,
Roth IRAs and traditional IRAs that work to boost your ultimate return by shielding
the investor from taxation at some point.
In an era where players can move to other teams freely
when contracts expire, teams are not afraid to say "Sayonara"
to a high-priced player commanding a big payday as a free agent.
The investing corollary is "valuation." In football, ownership
has a concern about tying up lots of money in a player whose production
may not match his paycheck. Instead, there are plenty of young,
hungry players coming out of the college ranks that can be nabbed
at a fraction of the price for a coaching staff willing to gamble
on their scouting prowess.
For investors, there are also plenty of fish in the
sea -- investments at reasonable valuations that have potential
for significant upside. Buying low and selling high is a winning
investing strategy, much more so than buying high, with the hope
of selling even higher. This thought is relevant not just to financial
assets such as stocks and bonds but also to assets such as real
estate. A home that sells for twice the price of a few years ago
now will require a much longer holding period and offers no guarantees
of replicating a similar performance.
There is much talk in sports about team chemistry,
how well the team functions as a unit. This is akin to giving your
investments time to show their true merits. Resisting the urge to
trade excessively will not only lower your investment costs but
could significantly boost your return. A survey by DALBAR Financial
Services looked at investor returns in the 19-year period between
1984 and 2002, a period when the Standard & Poor's 500 Index
increased at an average annual rate of 12.9 percent. While the average
U.S. stock mutual fund was up an average of 9.6 percent annually
during that stretch, the average individual mutual fund investor
earned just 2.7 percent annually. Why such a large gap? Excessive
trading and attempts by investors to "time the market"
are the primary culprits.
Finally, all teams in the National Football League
are governed by a salary cap, an annual ceiling on the total that
can be spent on player salaries and bonuses. While the rest of us
are dealing in much more modest numbers, the concept is the same.
We all have limited dollars to invest. Therefore, we must act prudently
with what we have. Minimizing investment costs, maintaining a long-term
perspective and appropriately allocating investments across asset
classes, rather than chasing the flavor of the month, all make for
the most efficient use of limited investment dollars.