Investment Strategy

Jeff Vistica, one of our business associates from Gradney & Vistica Financial Management offers this post with a comparison of my golf game to some other people’s investment behavior.   Enjoy!

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What’s your take on golf?

Jeff Vistica,

You may be for or against the sport or maybe you’re not going to adopt a stance either way. Regardless, I hope you’ll chuckle at a comment by Santa Clara University Professor of Finance Meir Statman, in which he opined, “Golf seems stupid to me — a cognitive error that misleads avid players into spoiling a good walk.”

Is the man crazy; clearly doesn’t get it? Or are you nodding your head in sympathy? Don’t worry, I’m not suggesting there’s a right or wrong answer. In fact, his challenge to golf enthusiasts along with his editorial title — “What Investors Really Want” — got me thinking about the value of differing perspectives.

When you take your leisure time, what is it that you enjoy the most? The competitive nature of sport…achievement…or perhaps a restorative pastime? What you choose doesn’t matter much to me. What does matter is whether you know deep down which is the right answer — for you. Wherever you find your reward should be the driving force for how you choose to play.

Translate that into the world of investing: like most years, 2010 offered up the usual frenzy of financial distractions that threatened to ‘hook and slice’ us into unforeseen sand traps. For example, consider this sampling of 2010 headlines:

  • May 29: “May 6 brought the ‘Flash Crash,’ a bewildering nearly 1,000-point slide that still defies explanation.” — The Wall Street Journal
  • July 23: “The equity markets are not working on a scale that is truly shocking.” — Financial Times
  • September 27: “Some 279 banks have collapsed since September 25, 2008.” — The Wall Street Journal
  • December 3: “The unemployment rate unexpectedly rose to 9.8 percent last month.” — The Wall Street Journal
  • December 29: “Housing market is still facing a blizzard.” — The Wall Street Journal

How did we respond to these and other reports? All too many investors reacted by swinging wildly at the risks and rewards from the previous hole, so to speak. Investors pulling their money in and out of the stock market documented this behavior. According to Morningstar, average stock mutual fund flows over the 36 months through November 2010 saw outflows of $414 billion, with $132 billion of these outflows occurring between November 2009 to November 2010.

Is this a wise strategy? Stocks in the S&P 500 Index ended the year up just over 15 percent. The Russell 2000 (U.S. small-cap) Index returned nearly 27 percent. International stock returns varied widely by country, with Peru and Thailand in the lead, and Greece and Spain in the basement. As a whole however, international stocks as measured by the MSCI EAFE Index, provided positive returns of just under 8 percent.

Investors who knew their game were best positioned to capture these sorts of returns in accordance with their personal risk/reward goals.  Those with a clearly established diversification plan realize a sound portfolio is built to ignore these distractions. They recognized that predicting market movements based on current events is nearly impossible and that a properly diversified portfolio is the winning strategy.

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