Any golfers out there? Earlier this spring I read Golf Is Not a Game of Perfect (describing my game perfectly!) by sports psychologist Dr. Bob Rotella. In the book, he emphasized focusing on things within the golfer’s control to achieve better results. Rather than worrying about wind, what other players are doing, or complaining about the speed of the greens or depth of the rough, he encouraged golfers to keep a good attitude, follow a pre-shot routine, choose only to play a shot they have confidence in, and focus on the smallest target.
Rotella’s advice regarding focusing on what golfers can control has some helpful parallels to achieving better investment results.
First, what are things beyond the investor’s control and, therefore, not helpful to focus on? The daily direction of world stock markets is beyond an investor’s control. Interest rates are beyond an investor’s control. Geo-political events are beyond an investor’s control. While there is plenty of media attention given to these things, focusing on trying to control or predict these things does not enhance an investor’s performance. Most often, it leads to worse performance and increased worry.
What is controllable by an investor and, therefore, helpful to focus on?
- Investors can let markets work for them. Rather than trying to beat a market, investors today can make markets and asset classes their allies by investing in funds that closely track them. Research continues to show that markets regularly beat the majority of managers, so why not increase the likelihood of success by choosing to get market-like returns?
- Investors can diversify their portfolios. Effective diversification involves more than having six mutual funds in a portfolio. The global opportunity for investors today is enormous, with over half of all available stock market value, and over two-thirds of all bond issuance, occurring outside the United States. The free flow of capital allows investors to access and benefit from thousands of possible investments.
- Investors can lower the costs associated with their investments. The average managed US stock mutual fund has an internal expense ratio of over 1.2% annually. An index or asset class fund designed to track the entire US stock market can be found today with an expense ratio of less than 0.10% annually. All things being equal, the lower cost investor starts out with a 1.1% return advantage each year! Vanguard Chairman John Bogle’s maxim still bears repeating, “The return of the market LESS COSTS equals the return to the investor.”
- Investors can use structure to manage risk and return. While no one seems able to predict what will happen from year to in investment markets, the larger body of academic work available today indicates that investors can raise their expected return in equities by emphasizing value, company size (small), and stocks with certain profitability measures in their portfolios. These “factors” can be quantified and are available to investors in a similar way to global diversification.
- Finally, investors can choose to effectively execute their portfolio. Choosing an asset allocation to apply across the entirety of our accounts (401k, IRA, personal, trust) creates the risk and return profile of our total investment portfolio. Rebalancing our total portfolio at regular intervals or according to pre-determined tolerances, maintains stock-to-bond, domestic-to-foreign and other purposefully selected ratios, managing the risk and return profile of our investments over time. Maintaining appropriate cash and liquid assets to fund near- and intermediate-term cash flow requirements is also in an investor’s control.
By choosing to focus on things within our control as investors, we can significantly raise the probability of our long-term success as well as reduce the worry and anxiety associated with those things we can’t control.
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