I attended the Golden State Warriors vs. the Houston Rockets basketball game towards the end of the 2016-2017 winning season. At the time, the Warriors were on a 10 game winning streak. In this game they came back from a 12 point deficit in the second quarter. The Warriors ended up winning by a score of 107 to 98 on their way to the NBA Championship.
Successful investing is similar to a team sport such as basketball.
The markets fluctuate similar to an individual game and entire season. As an investor we should accept the ebb and the flow, the losses and the wins. We should contain our emotions as best we can when losing (money) and winning (gains). Most studies show ‘buy and hold’ and focusing on the long term (vs short term trading) to be a successful strategy.
A basketball team is a diverse mix of 13 players. Some are experienced, crafty veterans while others are younger, talented athletes with enthusiasm and fresh legs.
Our investment portfolio is best diversified similar to a sports team. I tend to prefer actively managed mutual funds, index funds and exchange traded funds which provide the diversification to reduce risk through ‘safety in numbers’. You can also build your own team (portfolio) of individual securities (players) if you do your own research and draft well.
Successful basketball teams usually play excellent team defense. The Warriors have Draymond Green, Andre Iguodala and Kevin Durant. Playing great defense can reduce losses while excellent offense by Curry, Durant and Thompson score points to help win games. Players such as Stephen Curry take many shots (which seem risky at times) but ‘taking the shot’ while having talent and skill normally will bring positive results and wins.
Within a diversified portfolio it makes sense to ‘take some shots’ by investing in emerging markets, certain growth sectors and small caps. Just keep those percentages lower relative to your risk tolerance. Look at the past performance to assess the risk/reward history. Vanguard Emerging Markets Stock Index Fund (VEMAX) was up +39% in 2007, down -52% in 2008, and up +76% in 2009. The 10 year average total return (according to Morningstar) is +1.88%. Emerging/Developing Market Equities can be quite volatile as you can see. Many other funds invest in similar emerging market companies so volatility will be high as well.
The Takeaway:
At some point your team starts losing (due to rebuilding, changes to the game, retirement and injuries). What do you do? Stick with them (loyalty) and accept the losses over years? How long do you support a losing team? If we compare this to your portfolio, it may be best to take some early losses and trade or draft for talented players and potential winners. This is where team loyalty and investing separate. You have much more at risk with major losses to your portfolio than your team’s losing season.