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How Investing is Like a Game of Golf
Submitted by Justin Hayek on October 28th, 2015If you've ever had the pleasure (or maybe displeasure?) of playing golf, you know how satisfying it is to hit the ball exactly as intended or frustrating when you can't even hit the side of a barn (a frustration I am all too familiar with). The same can be said for investing: seeing an investment turn out as expected is a great feeling, but when an investment goes south...well we don't need to re-live those feelings.
Golf can easily be used as a metaphor to investing. Here are some of the similarities I can think of between investing and the great game of golf:
In golf, recovering from a missed shot only requires one good shot.
When investing, disappointing investment performance over a period can be recovered by the next's.
Obsessing over the daily or even monthly performance of your portfolio and extrapolating that to future months or years will do you more harm than good. This would be the equivalent to hitting a poor golf shot and assuming that the rest of your round will be terrible. Just like Tiger Woods here, who pulled off a great recovery from an errant shot, bouncing back from last period's poor investment performance can be recovered in the next.
Developing a proper investment plan and understanding what you own and why you own it is the first step to positioning yourself for a recovery. Investing involves some volatility, because the value of investments fluctuate, but one month's poor performance doesn't make for an ill-investment.
A golfer uses different types of golf clubs to navigate himself around the golf course.
An investor uses different types of investments to navigate their portfolio to a financial goal.
Having a golf bag of only one type of golf club doesn't do any good. A golfer needs a mix of woods, irons and a putter (as above). Each type of golf club serves a purpose. Woods allow a player to hit the ball longest, irons are meant for approach shots and accuracy and a putter is to complete the shortest of shots and thus the hole.
Investors have so many different types of investments to choose from and I don't mean only amongst stocks. There are bonds, preferred shares, cash, real estate too. Putting together a portfolio consisting of just one of these is like having a golf bag of just one type of club. You would be missing out on the benefits and advantages to all the others! Having the right mix between stocks, bonds, cash, real estate and preferred shares gives you the greatest advantage to reaching your financial goals.
A golfer has to always be prepared for unexpected weather.
An investor has to always protect his portfolio from the unexpected.
Source: Washington Post
Living in Vancouver one should know how the weather forecast is never a sure bet. As a golfer, especially in the winter, this means ensuring you have all the right equipment for a successful game (umbrella, towel, dry gloves etc) because the weather, and preparing for it, has a huge impact on a golfer's performance.
Investors want to protect their portfolios from the unexpected. As we all know, unexpected bad economic news, poor earnings or even something as rare as a terrorist attack can wreak havoc on your investments. You would be best served to protect your investments from unforeseen events. The best way to do this is to have an allocation to cash and bonds in your portfolio. The advantage to doing this is protection to your portfolio's downside because when the markets go down, bonds go up. Ignoring the fact that unforeseen events can negatively impact your investments means putting your entire portfolio at risk.
Some golfers are willing to attempt risky shots in pursuit of a lower score.
Some investors are more accepting of risk in pursuit of higher returns.
If you've ever had the opportunity to play with golfers at a higher skill level, it is easy to discern between those players who are risk takers and those who are risk averse. A golf professional who is known as a huge risk taker is Bubba Watson (see above). He's the type of player who will attempt shots that few other players are comfortable with. He does all of this in the hope of producing a lower score.
This element of risk tolerance also applies to investing. An investor's risk tolerance can range from totally risk averse to risk taker. When investing, the benefit to taking on additional risk is to generate potentially higher returns. Not taking on any risk what so ever can lead to sub-par returns and a new risk; the risk of out living your financial assets, which is the greatest risk of all. Determining what your risk tolerance is is one of the first steps to creating your investment plan.
Keep these tips in mind the next time you play a round of golf and in your investing endeavors because you don't want to end up like this guy...