I have been an avid tennis player since childhood. After time off due to an injury, I am ready to get back to playing tournaments very soon. My kids are also starting to play competitively, and that has got me thinking a lot more about tennis these daysand about the parallels between successful tennis and successful investing.
Avoiding Unforced Errors is Key
The biggest weapon that a tennis player (at the club level) can have is consistencyavoiding unforced errors. Pounding a great shot into the corner for a winner as your opponent scrambles for it is certainly gratifying, but repeatedly going for too much on your shots is likely to result in a bunch of easy points for your opponent and may ultimately cost you the match. Being able to consistently put the ball back in play puts lots of pressure on your opponent to do something special to win the point. In tennis, the first order of business is: “don’t beat yourself!”
In investing, avoiding unforced errors can go a long way toward helping you reach your financial goals. Here is a list of unforced errors in investing that are easily avoided:
- Trading too much (fees, taxes and bid-ask spreads will take a toll)
- Investing in funds that carry hefty fees and commission charges
- Not managing your portfolio in a tax-efficient manner
- Concentrating your holdings in too few securities, sectors or asset classes
- Not following the Wall Street adage “Buy low, sell high”
- Not using your tax-advantaged accounts (IRA, 401(k), etc.) so as to maximize the value of the tax umbrella they provide.
When playing a match, it is important to understand what is actually happening in the match and why. Are you dishing up too many short balls that your opponent easily puts away? Is he or she having trouble returning the slices you send to the backhand side? Is your kick serve presenting a bigger challenge for your opponent than your flat serve? As a match progresses, the wily tennis player continually makes adjustments to try to match his strengths with his opponent’s weaknesses.
In investing, it is important to stay aware of the environment and be ready to make small adjustments as things change. Because the sentiment of global investors can change very quickly, astute investors will frequently have opportunities to buy good assets that have been beaten down due to negative sentiment and to sell assets that have become too optimistically priced. Staying aware of what is going on in the markets and why will help investors to spot opportunities.
Use a Variety of Shots
In tennis, you make things more challenging for your opponent if you use a variety of shots during a matchdrop shots, lobs, slices, topspinand move your ball placement around so that your opponent does not get used to the seeing the same shot over and over. Also, if you have developed a broad arsenal of shots, you will be better prepared when one particular shot is not working. Topspin backhand not working well today? Hit more slices!
In investing, there is a wide range of potential asset classes that are useful in constructing a portfolio that generates the most return per unit of volatility. Because different asset classes do not move in lockstep, owning a broad selection of them can help to reduce portfolio volatility. Many investors are too narrowly focused and would do better (and sleep better) if they employed a greater number of asset classes in their portfolios. Click here to see the asset classes we use in our client portfolios.
You’ve Got to Play to Win
And finally, in tennis you get no benefit from it if you don’t show up to play. Your game will not improve. The same with investing. Many investors worry about the wrong thingnamely that the stock market will go down 10% right after they start investing. What they should be worrying about, in my opinion, is missing out on the substantial benefits that a properly diversified and periodically rebalanced investment portfolio can provide over the coming decades. In both tennis and investing, you have to play if you want to win.
To learn more about how we manage client portfolios, please visit us at www.orionportfolios.com
By Peter C. Thoms, CFA