Investing Lessons from Golf

Successful golfing and successful investing are similar. The key to both is determining how much risk is appropriate to accomplish your goals and when it is not.

Watching the different styles of the golfers at the Masters reminds me of an analogy that I sometimes use while talking to prospective clients. While each of the golfers tries to complete the four rounds of golf in the least amount of strokes, the way they accomplish this varies. That is also true for investors.

All investors should strive to accomplish a certain goal specific to their needs and wants. However, just as players use different styles to accomplish their goals, so do investors with their style and tolerance for portfolio risk. You must understand the trade-off between portfolio risks and the returns.

As your situation changes, your investing style should, as well. You can afford to be more aggressive in your early working years, but as you near retirement, you should be more conservative and risk averse. A trusted advisor can help match you to a portfolio for your needs and your ability to withstand risk.

For example, a par five hole on the golf course means that the golfer must hit the ball from the tee to the hole on the fifth shot to be on par. Golf course designers, especially on the more challenging courses, routinely design the course to present the players with a risk-return tradeoff throughout all 18 holes. The player can sometimes make a Hail Mary play such as driving the ball over a lake to reach the green in two shots.

If the player makes this risky shot, he could possibly sink the putt in two strokes, putting him far ahead of an opponent who played it safe. However, if this risky shot hit the water instead of the green, then the result is a negative score of six or more.

Investors encounter these risk return trade-offs, as well. There are asset classes like small company, value and emerging-markets stocks that can potentially deliver higher returns than blue chips. Trouble is, they come with added risks, such as more short-term volatility than the market in general.

On Wall Street, they say that there is no such thing as a free lunch. You don’t get returns for zero risk. If you want a high investment return to reach your goals, then your portfolio needs to include the higher performing and higher risk asset classes such as stocks.

Phil Mickelson is notorious on the golf course for taking risks when it’s not appropriate. Try not to follow his lead when you’re investing for your goals. Unlike a real round of golf, investors have no opponent to compete with. You only need to worry about yourself. Your buddy might make a killing on penny stocks, but it isn’t necessarily the best strategy for you.

If you are on par, stick to your plan, and if you come up short, a risky play might help you reach the goal. Find the appropriate risk level, plan a well-diversified portfolio and hold it through good times and bad to accomplish your life goals.

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Dan Crimmins is the co-founder of Crimmins Wealth Management LLC in Woodcliff Lake, N.J. His websites arewww.CrimminsWM.com and www.RootsofWealth.com.
 
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