What can investors learn from All Stars?
Baseball’s best players gathered in Minneapolis this week to participate in the All-Star Game. If you’re a fan or even a “weekend athlete,” you can admire these players for their abilities, even if you — like the vast majority of humanity — can’t hope to duplicate them. But if you’re an investor, you may be able to learn some practical lessons from the All Stars.
So let’s look at a few common All Star traits to see how they might apply to investors:
Consistency — All Stars typically don’t just have a few good weeks or months — they tend to be consistently excellent, year after year. As an investor, you, too, need to strive for consistency. Instead of periodically chasing after “hot” stocks, try to follow a long-term strategy by staying invested in the financial markets, through both “up” and “down” periods, and by rebalancing your holdings, as needed, to reflect changes in your life.
Ability to avoid errors — Everyone makes mistakes, but All Stars seem to make fewer of them. Whether it’s fielding balls cleanly, successfully executing a sacrifice bunt or not walking a player with the bases loaded, All Stars seem to avoid errors while making the right moves at the right time. When you invest, you need to avoid common “errors,” such as investing either too conservatively or too aggressively. Instead of going to either of these extremes, build a portfolio appropriate for your risk tolerance but still capable of helping you reach your goals.
Preparedness — All Stars keep themselves in great shape and often develop additional skills as the years go by, such as developing a new pitch or learning to hit the ball to different parts of the field. By preparing themselves in this way, they can take advantage of opportunities as they arise. As you invest, you will also need to be prepared to take advantage of new opportunities. One such way to prepare is to have enough liquidity in your portfolio to make appropriate investment moves. In addition to preparing for opportunities, you’ll need to prepare for challenges that could jeopardize your investment strategy. So, for example, you may want to build an emergency fund containing six to 12 months’ worth of living expenses. With such a fund in place, you may not have to dip into your long-term investments to pay for short-term needs, such as a major car repair, a new furnace or a big bill from the dentist.
Awareness of limits — Not even the best All Stars can do everything well. A good “singles hitter,” for instance, won’t waste a lot of effort in trying to hit home runs, while a powerful, but slow, slugger might not attempt to steal a base. Investors have limits, too, based on their sophistication and their financial resources. To illustrate: Some wealthy and highly experienced investors may embark on complex or risky strategies, or purchase hard-to-understand investments. But these risky techniques and complex investments are not for everyone — and smart, “everyday” investors know this and stick with proven strategies and comprehensible investments.
You may never step foot on a baseball diamond. But as an investor, you can still pick up some “gems” of wisdom from the All Stars.
Doug Drost is a certified financial planner for Edward Jones, 2262 Reno Highway.