Swinging for the fences
Baseball season is finally over and congratulations to the Houston Astros on winning their first World Series, defeating the LA Dodgers 5-1 in Game 7. It’s been a long dry spell for the Astros, who were established back in 1962 (fun fact: they were originally known as the Houston Colt .45s). But today their fans are celebrating, and the team will no doubt be talked about in the press and fans alike for a while. But the LA Dodgers won’t be, because they didn’t win.
You see, people always remember who won big sports championships, but they don't necessarily remember the teams that have constantly have winning seasons and consistently make playoffs. The LA Dodgers have the 3rd best lifetime win/loss percentage record in the majors. The Astros sit at #16 on that list and have lost more games in their lifetime than they have won.
As a long-suffering Toronto Maple Leafs fan, I assure you that constant losing seasons are not fun. Heck, the Leafs actually sold t-shirts celebrating the fact that they were in the post season back in 2016. Fans paid money for a shirt that said "we made the playoffs". Made, not won. And yes, I bought one because it seemed like a pretty big deal at the time.
If I’m honest with myself, I would rather have the Leafs be a serial contender like the Detroit Red Wings than win one single Cup in my lifetime. Because the ride would be much more enjoyable. Most fans would be reluctant to admit the same, but deep down, they would probably prefer a good winning team for many years than one single championship.
OK, what’s the connection to “top performing investments”? Well, financial advisors face a similar dilemma. You see, their clients love a winner. They love having the best performing fund or stock in their portfolio. If a fund gets a 5 star rating, it sees massive inflows. People want to own it. The top performing stock on an index gets media coverage and is the subject of dinner party bragging about investment portfolios. People love to buy winners.
The problem is that it doesn't work. Typically, the best performing fund in a category one year, will underperform in the future. Take a look at this recent piece form the Wall Street Journal on the subject.
It’s often the same with top performing stocks or sectors or the market. If you chase the top performers, you will likely end up buying them and selling them low. Plus you will take on more risk in your portfolio that you should. You don't want the hottest stock, the best performing fund or the “can't lose” strategy. Go put all of your money in a Bitcoin ETF and see what happens. You may double your portfolio in a year, but will likely halve it the next.
What's more important is being consistent. And consistent often means boring. You don't want a fund that was first quartile last year - you want one that is consistently second quartile. Over the long run, you need consistent performance, not star performance. You want to buy a strategy that will work over the long run and stick with it.
However, the problem is that investors will often fire their financial advisors for being boring and consistent. They fired them in 1999 for not just buying high flying Internet stocks, which got crushed in 2000. They fired them in 2010 when they had missed the big rebound in commodity stocks post financial crisis, which fizzled in 2011. And they are firing them now for not owning Amazon and the rest of the FANGS. Or worse yet, their brother-in-law made a killing in Bitcoin and they want to know why they don’t own it.
But your advisor should not be trying to beat the market or own the hottest stocks. They should be trying to help you achieve a goal. Retirement. Sending your kids to university. Buying a vacation home. And that goal requires a focus on risk, not just return. That goal requires some realism based on expected returns. It’s not just “get the best return possible”. An advisor stops you from buying hot trends that could fail. Or more importantly, stops you from selling solid investments when the market gets irrational.
Think back to baseball. Should you stack your team with home run hitters? Or with players that have a high on base percentage? Read Moneyball to find out that answer (or watch the movie if you're lazy and/or like Brad Pitt). Spoiler alert: On base percentage wins. Go for on base percentage. Go for consistency. Tell your advisor that you don't care if she or he beats the market. Tell them you care if you reach your goals. Future you will thank you.
All that said, I hope your favourite baseball team wins the World Series more often. But if not, I would rather that you get many games of great baseball to watch along the way and see more wins than losses.