Oleksyn: Course management helps limit investment ‘bad shots’

In many ways, I think that successful investing is analogous to playing great golf.

In many ways, I think that successful investing is analogous to playing great golf.

Golf is a sport where scratch players win not by necessarily hitting the most number of great shots. They win because they hit the fewest number of bad shots.

I think that outstanding real life investment success also proceeds from simply not making the equivalent of a ‘bad shot’ in golf.

One of those bad shots that I repeatedly see is that people don’t have a financial plan or an investment strategy to accomplish that plan.

We have all seen this situation evolve.

A regular guy goes to his bank or talks to his neighbours, his friends and his financial product salesperson and makes his annual RSP contribution.

Every year, he puts his money into the latest, greatest fund that performed really well last year. Ten years later, he has a haphazard and cluttered collection of 10 different mutual funds.

Perhaps even worse, he has spread those three or four funds with three or four different financial product salespersons at three of four financial institutions.

By neither having a financial plan nor an investment strategy for carrying it out, our friend is the proud owner of the world’s least efficient portfolio, with gaps, redundancies and fee inefficiencies that would drive him crazy if he were even remotely aware of them.

Does he know why he bought a particular fund? What piece of his investment puzzle did each fund provide? Was it a core holding? Was it to provide income or capital growth? Was there a better fund? Did the small cap, the specialty cyclical or emerging market funds get bought and sold at the right times? Was the portfolio rebalanced so that he bought low and sold high?

Even more importantly, do the funds, ETFs or individual securities in his portfolio have a high probability of generating the rate of return that he requires with the kind of risks that he preferred to take?

Did he explore the financial planning tradeoffs involved? How much could he save? When did he need the portfolio to provide an income? How long does the income need to last?

This investor without a financial plan or investment strategy is, in essence, making a large number of bad shots.

Just in the last few months, I have seen people that have bought rear load and front load versions of the exact same fund. I have seen people buy dividend funds and return of capital funds (ROC) in their RSPs and not need the income.

I have seen people buy three different large cap Canadian equity funds.

I have seen people with very low risk tolerance buying ‘high yield’ funds.

My message to investors is that all they have to have a plan. They have to know how the golf course is laid out. They have to know the shot that each club in their golf bag is best suited for.

Then, all they have to do is stay on the short grass and don’t make bad shots!