Truly Diversified Investments or Fourteen Similar Golf Clubs?

by Dave Scott on August 9, 2012

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I started investing around the time I started playing golf – no coincidence there, both need disposable income. My bookshelf had a few golf beginners’ guides next to books like Peter Lynch’s ‘One Up on Wall Street.’ I later learnt that Peter caddied for Fidelity’s president before he got his first job as an intern there.

Golf and investing have many parallels. Winning at either requires discipline, hard work, focus, patience, a long-term mindset, cutting your losses, staying in your comfort zone, and emotional control.

One equally important parallel that is often overlooked is diversification.

After I started golf, I realized the value of fourteen different clubs each uniquely suited to the various obstacles, opportunities, sand traps, hazards, and sunk balls I faced through my quarter-marathon trek from holes 1 through 18.

Likewise, as I got deeper into investing, I started to understand the concept of diversification.

On the golf course recently we were joined by a new acquaintance, I’ll just call him Jack.

After investing in his first mutual fund, Jack decided to diversify from one fund manager to two. His second investment was in another mutual fund with largely similar holdings as his first fund. He hoped that if one fund manager screwed-up, the other would make enough to get him to breakeven.

He was a little peeved though when the broad market fell and both his funds moved virtually in sync into negative territory, taking him down with them.

On his third investment, he abandoned stocks and conservatively put his money into a bank CD. Then someone told him of higher interest rates in equally-safe AAA-rated bond funds, and that’s where he went next.

Long story short, Jack made his share of mistakes and paid his dues to Wall Street as an individual investor trying to make millions. He spent many frustrating hours researching stocks, funds and fund managers but still ended up as confused as a hungry baby in a topless bar.

Finally, Jack realized that he had neither the time nor the expertise or money to scour the world and build a truly diversified global portfolio. As Jack said it, with his tail tucked firmly between his legs and tied down with duct-tape as added precaution, he sought professional advice.

He spoke with several financial advisors, and said that his past fumblings in the stock market prepared him enough to not look like a complete idiot. He finally picked an advisor who was very knowledgeable, open about the risks and rewards yet firm enough to lead him, and had a wide-angle lens and resources that allowed Jack to build a solid portfolio.

I chimed in that many of us had a similar epiphany, perhaps not as late as Jack though. Just as Tiger Woods Phil Mickelson could not have gotten to where he is without the right coach, so even the brightest of us are well-served if we can find a trusted coach who can lead us through the investing world so our holes-in-one, eagles and birdies far outnumber the inevitable double-bogies.

Now, Jack no longer owns multiple USA-focused mutual funds that essentially mirror each other at a macro level, but has diversified across asset, sovereign and risk classes across the globe. He has investments in places like China, India and natural-gas-rich Qatar. His mutual funds include stocks – small caps, large caps, growth, dividends and specific sectors such as technology, REITs and healthcare; bonds – domestic and international; currency hedging; and commodities.

Just as you wouldn’t play golf with fourteen drivers in your bag, or fourteen putters for that matter, so you shouldn’t play the investing game with multiple mutual funds that essentially have similar risk-reward profiles.

Most of us typically “diversify” within one broad basket but really need to think “outside the basket” – and include multiple sectors and risk-adjusted asset classes in our investments.

Fortunately, financial products such as Exchange Traded Funds, index funds and international mutual funds are traded with high liquidity on U.S. exchanges and make global portfolio diversification easily doable while sitting at your laptop in pajamas.

In your portfolio, include the mutual fund equivalents of long-game drivers, short-game irons, wedges and putters. Team up with a trusted high-caliber coach, just as Jack did. Thoroughly enjoy your today and sleep well knowing you’ll be financially secure by the time you retire. I am sure the investor and the golfer in Peter Lynch would agree.

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This post was written by...

– who has written 13 posts on Excess Return.

Dave holds an MBA in Finance and Accounting with over a decade of experience with US and international capital markets, investment research, asset management and writing on global financial and economic topics. Dave enjoys non-fictional reading, geopolitical news and events, and keeping abreast of finance, technology, and human follies and triumphs.

{ 5 comments… read them below or add one }

Ken Faulkenberry - AAAMP Blog August 9, 2012 at 5:09 pm

Good advice! With a little help investors can self direct their investments. This allows them to avoid fraud, keep their expenses low, and increase investment returns. I am dedicated to getting that message out; so I enjoy it when I find posts such as this!

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Dave Scott September 14, 2012 at 12:36 am

Hi Ken, thanks for the post. Love your blog – http://blog.arborinvestmentplanner.com/. I think patience and commitment are very important to investment success. I am always looking for ways to help the small guy get ahead – and sometimes that may mean hiring an adviser to track a well-diversified portfolio. But I always urge investors to know what’s happening and get educated on their various options to generate solid returns. I think this is where your blog shines.

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Rick Coyle August 10, 2012 at 8:07 am

Great great metaphor! I love the point about not having 14 drivers in the bag.

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Dave Scott September 14, 2012 at 12:40 am
Rick Coyle September 14, 2012 at 6:35 am

Thanks Dave.

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