LOOK AT IT THIS WAY
Any golfer knows that club selection can be a significant contributor to the success or otherwise of their game. Pulling the driver out first-up on an unfamiliar course full of water, trees and other traps can be a recipe for disaster.
Wind, temperatures, altitude and the nature of your swing are just a handful of the variables that can influence your club choice. Sometimes a more conservative shot off the tee with a long iron can be the smarter and safer option.
Likewise, closer to the green, being overly conservative or aggressive with your club selection can leave you either holed up short in a sand bunker or way out beyond the back of the green in the trees, facing another three shots to the pin.
That’s why you need more than a couple of clubs for a successful round of golf. But you also need the right temperament. The best golfers play within themselves and don’t let the odd poor shot put them off their stride.
Investing is a little like golf. You need a “full set of clubs” — a diversified portfolio, featuring stocks, bonds, property and cash. Within each broad asset class there are sub-asset classes that play different roles in your portfolio, just as different golf clubs do different jobs.
Different clubs for different types of shot
The riskier stocks (value, small caps, emerging markets) are like your woods. They’re good for long-term investing, offer higher expected returns, but are more volatile and unpredictable.
If you want to cover some ground but with less variability, you might choose large caps — the equivalent of long irons. The high relative price stocks are like your mid-range irons — the expected return (distance) is less but you can get more of a lift with less variation in outcome.
Bonds are more like the short irons and pitching wedges of your diversified portfolio, built for the most controlled defensive shots. Putters are like cash — they get you home.
Like all the best golfers, you also need a sense of discipline. Accept what you can and can’t control and learn what you can and can’t live with. Accept there will be the odd bad shot (poor market), let the ball (market) do the work and focus on your swing.
Don’t forget the caddie
And one final thing. Almost every professional golfer will have a caddie. Someone to bounce ideas off and provide them with any information they might need. Someone to counsel and encourage them when the pressure’s on and alert them to dangers they may not have seen.
Yes, you could probably manage without one. But do you honestly have the time and expertise?
Remember, there’s far more to it than just carrying the clubs.
The aim of this series to help demystify investing and personal finance by using simple visual metaphors. If you’ve found this latest analogy helpful, you may want to try these:
Riding out the market turbulence
A tool to get you to your financial destination
Saving money with the cappuccino strategy
From little things, big things grow
Shift your focus away from passing showers
What is the “all-roads vehicle” of investing?
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