I live in the New York metropolitan area, where most people are Yankees fans.
I, on the other hand, became a Mets fan in the late 1960s and have been a loyal fan ever since. It has been a hard road with many disappointments along the way. But I have persevered where many have faltered. Most people want to root for a winner, and as a result many will change loyalties to make sure that they are with the winning team.
It all comes down to goals. In my case I believe that I am a true fan of the game. My goal is to watch and encourage my team get through the season, achieving its best with the players in uniform at the time. I critique the manager for the different strategies he implemented during the game. I critique ownership for their ability to put a solid team on the field. I enjoy the progress that the team makes during the year. My goal is not to predict the winner of the next World Series, but to enjoy our national pastime.
Investments as Team Players
I realized recently that my view of—and approach to—the Mets has shaped my investment style. In my financial guidance as in my approach to baseball, I am focused on goals.
In the investment world, my goal is to help my clients achieve their individual life goals. I design a customized plan to try to do this with minimal risk. I am not trying to pick the fund that will win the World Series of mutual funds in the upcoming year. That is very difficult to do; very few are repeat performers. Rather, I help my clients build their portfolio with investments that are team players, so to speak.
In other words, I allocate assets according to Mr. Markowitz’s Modern Portfolio Theory. The fundamental concept behind MPT is that the assets in an investment portfolio should not be selected individually for their own merits. (Which sounds like something the Yankees should think about.) Rather, it is important to consider how each asset changes in price relative to how the price of every other asset in the portfolio changes. This is known as correlation.
Correlation and Risk
When I review new client portfolios, I sometimes see a collection of mismatched selections. Some have put together a portfolio of top-rated large cap investments and sprinkled in some international or emerging investments that they might have read about or individual stocks of companies whose products they buy. They may buy index investments with thousands of securities. They think that by putting together as many winners as possible they will achieve investment success.
When I put a portfolio together, I remain mindful of the correlation coefficients of the various asset classes represented. A value of 1 is perfect correlation (the investment returns tend to move in sync). A value of -1 is negative correlation (the investment returns tend to move in opposite directions). We try to keep the number as low as we can. We also make sure that we are dealing with long-term numbers.
Similarly, the risks should balance out as well. For some clients we can minimize the risks even further by using a laddered bond portfolio, where individual bonds are staggered, so that one matures every two years or so. We expand the bond maturities to increase the overall portfolio yield when necessary. My clients can participate when interest rates are on the rise, because they’ll always have a bond about to mature.
Note that I am not advocating for bond-heavy portfolios here. Investors nervous about a risky market may have, in fact, over-invested in bonds—particularly Baby Boomers trying to protect retirement funds. Make sure you’re balancing bonds with other investments. Dividend-paying stocks, for example, carry a higher risk than U.S. Treasuries, but can offer a source of current investment income with reduced correlation and gains from performance over time. What is critical here is that there has to be a limited need to liquidate the underlying stock (you will be living off the dividends) due to the volatility of the stock price. You don’t want to have to liquidate when the values are low.
Whether you’re working with a financial advisor or going solo, my advice for investing is to keep your eye on the ball and have patience. Life may throw you a curve ball, but take my advice: Stick to your plan, and make adjustments when necessary.
Let’s go Mets!
Jeffrey Christakos, CPA, CFP®, CLU is a Registered Principal offering securities through United Planners Financial Services, Member FINRA/SIPC. Advisory services offered through Westfield Wealth Management. Westfield Wealth Management and United Planners are independent companies. The views expressed are those of the author as of the date noted, are subject to change based on market and other various conditions, are not a solicitation to purchase or sell any security and may not reflect the views of United Planners Financial Services. Keep in mind that current & historical facts may not be indicative of future results. Asset allocation and diversification do not ensure a profit or protect against a loss.