Jul 12

Golf and Investing

by Patrick Rohe, CFP®

I know this might be hard to imagine for most of us golfers, but which of the following scenarios would you rather choose:

1.   Shooting par every time you go out and play a round of golf.

2.   Shooting below par 25% of the time you play and failing to reach par the remaining 75% of the time

 

It’s an easy decision, right?

The game of golf has many parallels to investing.  A score of par is similar to a stock index.  It is the base score everyone is trying to reach.

Continuously shooting par, similar to passive (index) investing, is what we do here at Rockbridge.  We try to control costs, manage risk and get as much return as the markets allow.  With index funds, you always get what you expect when it comes to returns and are left with no surprises.  It’s much like going out and shooting par every time you golf.  Basically, we help you avoid the double and triple bogeys that we are all too familiar with!

The other scenario is to strive for a score lower than par, which is similar to active investing.  You incur additional costs – Wall Street “experts”– in an attempt to beat the return produced by an index.  However, evidence shows that you will only be able to do so 25% of the time.  The remaining 75% of the time you will underperform; and to make matters worse, you will underperform by a much bigger margin than you will ever outperform!  This makes perfect sense.  When active managers continuously strive for outperformance, they must take additional risks which lead to mistakes.  No different than a golfer trying to make eagle on every hole.  He will find himself shooting much worse with that constant added pressure!

The situation only gets worse with time as well. Just like shooting a score below par gets harder as we age, your chances of beating index returns goes down drastically when you look at longer time periods.  Over extended periods of time, your probability of beating index returns falls into the single digits!  Larry Swedroe, in a recent CBS News article, goes on to state that this value is lower than what we would expect by sheer chance!  When most investors are saving for long-term goals, like retirement, those don’t seem like odds I would be willing to pay extra for!

So, if shooting consistent pars on the golf course sounds like the no-brainer choice, then why do so many people still engage in active management when it comes to investing?  In golf, spending additional time/money to improve your game might pay off in a lower score, but unfortunately this does not hold true when it comes to investing.  Control costs and shoot for par (index returns) and you will be much farther ahead in the long run.  Sometimes it takes a simple analogy to help lead us to making wiser and more prudent life decisions!

About the Author

Patrick Rohe CFP is a Certified Financial Planner at Rockbridge. “Upon graduation from Cornell University, I was recruited by a large brokerage firm. After months of sales training and minimal help in understanding even the basics of investing, I quickly learned that the brokerage firm model was not for me. I then made the transition to Rockbridge, a fee-only financial planning firm, where I truly enjoy helping people and making a difference in their financial lives!”. Patrick is a graduate of the Applied Economics and Management and Animal Science (B.S.), Cornell University, and the CERTIFIED FINANCIAL PLANNER™, (CFP®) program. Learn more and/or Contact Patrick.


You Might Also Like

Other articles filed under Family Finances

Market Commentary January 2016

January 21, 2016
Stock Markets In 2015, domestic large cap stocks (S&P 500) and REITs were up while other markets were down – emerging markets were off big!  The positive results in the S&P 500 were driven by just two stocks – Amazon...
Continue Reading

The Problem With Diversification – Emerging Markets

January 20, 2016
One of the tenets of successful long-term investing is the practice of portfolio diversification.  Through diversification, investors can increase their expected long-term return for a given level of risk (volatility).  This is accomplished by investing in assets that are not...
Continue Reading

What’s Happening At Rockbridge

January 19, 2016
2015 was an exciting year of growth and change at Rockbridge.  Market returns were less than ideal for the year, but we continue to see growth in our fee-only business model as prospective clients seek out unbiased advice and professional...
Continue Reading

Investing and Action Movies

January 15, 2016
When we go to a good action flick, we enjoy the suspense and surprises, but no one wants that experience when investing.  James Bond and Mission Impossible would not be box office hits without some interesting plot twists, and an...
Continue Reading

Road to Rockbridge

January 13, 2016
Our Rockbridge team is continuing to grow, and as a new member, I would like to take a moment to introduce myself. My name is Lisa Cellucci.  I was born, raised, and educated right here in Syracuse.  Even as a...
Continue Reading

‹ Back to Blog Home

getting started is simple

315.671.0588 info@rockbridgeinvest.com Schedule a meeting Sign Up for Our Newsletter