One of my favourite analogies is that successful investing is like playing great golf.
I always admired those golfers that just hit it down the middle of the fairway all the time and never make a bad shot
Par! Par! Par! That must get pretty boring.
Outstanding real life investment success also results from simply not making the equivalent of a ‘bad shot’ in golf and just ‘hitting it down the middle of the fairway.’
One of the bad shots that I repeatedly see is people under diversifying their investment portfolio.
When I say under diversifying, I mean the fatal narrowing of a portfolio down to essentially the same idea, whether that single idea is just one or two stocks or just one or two industries or just one or two asset classes.
Everyone remembers a time when everyone was panicking to buy Japanese equity, Kelowna real estate, Brex mining, technology stocks or tulip bulbs.
It’s even worse when these investments compromise the entirety of their portfolio.
This one’s a biggie.
This is the golf equivalent of only using your favourite club, like a five iron, for off the tee, down the fairway and on the green.
Great golfers all know that putters, wedges, fair way woods and drivers all have their place in the game of golf.
A scratch golfer has all those different clubs in their golf bag, realizing that certain clubs are designed for certain shots.
There are reasons why you use a driver, a seven iron or a putter.
And there are reasons why you should always diversify the holdings in your investment portfolio.
The first reason is that there are always unforeseen events that can occur and negatively affect your portfolio.
Remember Enron? It was the winner of Fortune magazine’s award for the most innovative company in the U.S. five years in a row, until it imploded in a firestorm of fraud.
So maybe there’s very important information that you know nothing about.
The second reason is creative destruction.
Remember beta video recorders, cassette tape players and walkmans?
Just because a company has a decisive edge on the competition now, doesn’t mean than an entirely different or better product won’t show up far sooner than you imagined.
The third reason is the cognitive error of over confidence.
If you are overconfident, then you can be absolutely positive that your choice of stock, industry or asset class is going to go straight up.
Of course, if that is going to happen, you would be foolish to own anything else.
It would just reduce how much money you’re going to make.
Sometimes people get confused between their opinions and facts.
Hoping and knowing something will happen are two entirely different things.
The best and most important reason is price, the difference between a good investment and a good company. A good company at low prices is great. A good company at high price is bad.
In order to invest successfully, you must always be reallocating between your asset classes and each individual investment. Some investments will be going up and some should be trimmed for a profit and sold when the price is deemed high. Others will be going down, which will allow you to buy low.
As in golf, a successful investor has all the different clubs in his golf bag because he never knows for sure, which one he will require next to simply hit that investment ‘down the fairway.”
Rob Oleksyn is an investment advisor and financial planner| with BMO Nesbitt Burns| in Kelowna. BMO Nesbitt Burns provide this commentary to clients for informational purposes only. The information contained herein is based on sources that we believe to be reliable, but is not guaranteed by us, may be incomplete or may change without notice. The comments included in this document are general in nature, and professional advice regarding an individual’s particular position should be obtained.