Why Par Should Be Good Enough
For Golfers And Investors
by: Brendan MageeLike a lot of people. I tuned into last week's Ryder Cup Golf matches between the United States Golfers and the European Golfers. I love the pride the golfers take in representing their countries and the enthusiasm displayed by the galleries. I am also blown away at how great the golfers are. They hit shots under pressure that I could only dream of pulling off maybe once out of 200 attempts. These players truly are the best in the world.
Now professional golfers keep score and it is always best to be under par. By that I mean, if the hole they were playing was a par 4 they would want to get the ball in the hole in three shots or less. It is amazing though that often times a match was lost by a player who played a hole over par. Par would have won or produced a tie, and thus in a lot of cases would have been good enough. Par, as it turns out, had a lot more value than the golfer may have realized before they even started their match.
The equivalent of par when it comes to investing is market rates of return. Market rates of return would be what a particular kind of investment has produced over a long period of time. It is the cost entrepreneurs and business owners typically pay to use other peoples money to build and make their businesses more profitable. For example, from 1927 through 2012 the long-term rate of return of U.S. Large Company Stocks was 9.82%. The long-term rate of return of International Small Company Stocks was 14.40%, and for U.S. Micro Cap Stocks was 12.26%.
If you were an investor investing in these kind of stocks and had a rate of return above these asset classes it would be the equivalent of shooting below par and outperforming the course. If you invested in these asset classes and got less than what the asset class produced it would be the equivalent of under performing the course and shooting above par.
Now the overwhelming majority of golfers do not play par golf. U.S.G.A. statistics bear that out. Par on most golf courses means you would be shooting every time you played golf between 70 and 72. There is a very good reason for that. Golf is a hard game to master. Go to any club and look at the scores of that club's best players and you will not see time in and time out that those players consistently shoot 70 to 72.
Fortunately for investors achieving the equivalent of par golf when it comes to investing is not that difficult at all. In fact it is much simpler than most investors realize. To achieve the rates of return mentioned above only required the investor to own those asset classes in their entirety and hold on to them. Sounds easy, but in the midst of a market meltdown holding and not selling seems like the last thing you would want to do.
However simply enough, those asset classes could be owned in their entirety simply by owning an index representing each category of investment. Those markets of investments would have produced the rates of return without the investor having to do a thing to achieve them. To put that in perspective, over a ten year period of time with a seven percent rate of return your principle doubles itself. The rates of return mentioned above outperform that pace. The overwhelming majority of investors do not come close to market rates of return. Statistics bear that out.
So what does the investor have to do to achieve market rates of return (again, the equivalent of playing par golf every time)? First, recognize how great it would be to achieve market rates of return. They need to recognize that that would put them in the upper echelon of all investors. They need to recognize that like golfers any strategy designed to outperform the course (shoot below par) will lead to under performance (like it does for most golfers playing bogey golf, it causes investors returns to fall well below what they need to achieve independence and dignity).
A golfer who tries to thread their ball through a thicket of trees in the hopes of getting through that small opening in the forest believing they can save a few strokes if they can just pull this shot off, usually turns a five into an eight, and an investor who loads up on a stock they believe will achieve instant riches usually endures a loss of capital they never planned for nor can afford.
Secondly, investors need to realize they can be assured of market rates of return simply by owning a particular asset classes index. This means the fund manager will not do anything to try and exceed the market rate of return. Their goal is to match it.
Third, investors need to recognize the signs that they are engaging in activities, or they are allowing their money manger to engage in activities, that are designed to outperform market rates of return and put an immediate stop to it. Stock picking, market timing, and track record investing are the activities that are presented to the investor as the strategies to use to produce stellar/above market rates of return. Their success depends on the money manager's ability to consistently predict the future. Just like the average golfer cannot consistently hook a shot around a tree and get over a pond that is 240 yards away, no one can consistently predict the future.
Make no mistake about it, it's not just being right once that would be good enough to outperform the market, those predictions would have to be right time and time again. No one on this planet has that ability. So make sure you have eliminated any and all gambling and speculation from taking place in your portfolio, and own the index that represents the investments you want to be in and you will be assured of playing the equivalent of par golf every time out.
As needs to be said, rates of return are not guaranteed and you need to consider all risks before investing.
Brendan Magee is the founder of Inevitable Wealth Coaching. With questions or comments go to www.coachgee.com or call 610-446-4322
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