Plan Your Play, Then Play Your Plan

A premier book on investing written over twenty years ago is “Winning the Loser’s Game” by Charles Ellis. Linking sports with investing, Ellis notes that while top tennis players win by making brilliant shots, most players win by losing fewer points than the opponent.   Investing is not dissimilar.

Investors can lose fewer points by executing a steady strategy, consistent with one’s own goals and ability to take risk.

As Ellis observes, many investors’ goal is to “place that brilliant shot” and beat the markets. Too few understand how much risk they should take and whether they can reasonably expect to achieve their goals given their spending and savings.

In reality, with a “beat the market” mentality, investors can be sabotaged by their own behavior.  The following JPMorgan chart illustrates the return of the average investor (in orange) compared to several other asset categories and two diversified, balanced portfolios (in blue).*

Due to emotional and behavioral biases, the average investor experiences a significantly lower return than both diversified portfolios. They lose the game by following their own personal preferences and intuitions, thereby deviating from the principals of disciplined investment planning and management.

Over HTG’s twenty-five year history, we have met many investors who have made mistakes based on behavioral biases. Trying to time the market because it is rising or falling, or because you think you know what the next year holds, is a common mistake. Having too much invested in your employer stock because you think you “understand it” and taking too much risk by being concentrated in one stock or one industry are among the top blunders. We’ve also seen investors damage their financial futures by acting on emotion and buying high or selling low.

One of our primary goals as financial advisors is to help clients avoid these common mistakes that are detrimental to their wealth. We help investors to reframe their focus on long-term goals and work with them to develop a game plan. Our key investment tenets are:

1. Investing is a means to achieve long-term goals.
2. Asset allocation is the key to balancing portfolio risk and reward.
3. Diversification reduces risk and improves performance.
4. Mutual funds facilitate optimal portfolio implementation.
5. Costs are important.
6. Active and passive approaches are complementary.
7. Discipline is essential to overcome emotion.

As Ellis remarks, “The encouraging truth is that while most investors are doomed to lose if they …try to beat the market, every investor can be a long-term winner.” This requires redefining objectives to align with long-term goals, applying self-discipline and patience.

 

* Source: J.P. Morgan Asset Management; (Top) Barclays, Bloomberg, FactSet, Standard & Poor’s; (Bottom) Dalbar Inc. Indices used are as follows: REITS: NAREIT Equity REIT Index, EAFE: MSCI EAFE, Oil: WTI Index, Bonds: Bloomberg Barclays U.S. Aggregate Index, Homes: median sale price of existing single-family homes, Gold: USD/troy oz., Inflation: CPI. 60/40: A balanced portfolio with 60% invested in S&P 500 Index and 40% invested in high-quality U.S. fixed income, represented by the Bloomberg Barclays U.S. Aggregate Index. The portfolio is rebalanced annually. Average asset allocation investor return is based on an analysis by Dalbar Inc., which utilizes the net of aggregate mutual fund sales, redemptions and exchanges each month as a measure of investor behavior. Returns are annualized (and total return where applicable) and represent the 20-year period ending 12/31/17 to match Dalbar’s most recent analysis.
Lex Zaharoff, CFA

Lex joined HTG in 2014. With over 30 years of experience advising wealthy families at four major private banks, Lex provides clients with a unique perspective on the art and the science of investing to achieve one’s financial goals.

As Adjunct Professor of Finance at NYU’s Stern School of Business, Lex teaches the MBA course on wealth management. He has a BSE from Princeton University and an MBA from Harvard Business School.