Invest with a similar mindset to that of a strong amateur tennis player -– defensively
Defensive-minded investing is an approach that focuses on risk first. Return is secondary. If are simply an offensive-minded investor looking to hit home runs, it’s possible that in certain market conditions your portfolio may not survive. Buying and Selling Regulation CF Shares is an option for those looking to do a business investment.
If your investment objective is both preservation of capital and moderate growth, there is a need to constantly weigh both objectives. Let’s face it, they are opposites – you cannot have growth while only preserving capital (assuming no risk whatsoever), so there has to be a balance. For other secure investment options, check here the best gold IRA company.
An excellent sports metaphor to help better understand the approach taken by a defensive-minded investment manager was presented by Charles Ellis in an article published in 1975 in The Financial Analysts Journal. Ellis referred to work done by TRW founder Dr. Simon Ramo, comparing professional and amateur tennis players in Extraordinary Tennis for the Ordinary Player. Ramo referred to professional tennis as a “winner’s” game and amateur tennis as a “loser’s” game.
The professional tennis player wins by hitting shots his or her opponent can’t return. The player who hits the most “winners” will be victorious. The opposite is true in amateur tennis. If you watch a typical match at the Palos Verdes Tennis Club you’ll notice that because most of us lack the skills necessary to hit winners, the amateur who can simply minimize or control his or her “losers” will be victorious. By focusing on defense and not losing the point, the defensive-minded amateur will typically beat most players – wear them down and basically let them beat themselves.
Ellis applied Dr. Ramo’s ideas to investing and showed that an investor’s focus should be to not necessarily go for winners (like the adroit professional tennis player), rather, to try to avoid losers (like the steady amateur tennis player). This defensive approach is much more likely to allow you to be successful investing in all market conditions – bull and bear markets. Bottom line, there is much we cannot control when investing, but we can maintain a focus on defense to minimize risk.
If one pays attention to risk, with the goal of not losing money first (return is secondary), it is quite possible to keep portfolio performance close to the market (i.e. Dow Jones Industrial Average) in good times and hopefully perform better (lose nothing or much less than the averages) when markets are in a prolonged decline (bear market). My experience has shown that the vast majority of investment managers lag the indices during strong bull markets and those who adhere to defensive-minded strategies may trail the indices by even more. But, managers who focus on risk control, particularly when stock valuations become extreme, will be rewarded with better overall performance.
So, what type of investor are you? Are you offensive-minded with an aggressive approach, hoping to hit a homerun? Or, are you defensive-minded with the goal of limiting losses and controlling risk? Are you content hitting singles and doubles?
True, the investor who is only focused on defense and takes almost no risk will earn minimal returns. Those returns in our current low-yield environment will certainly not even allow you to keep pace with inflation. So, there has to be a balance between trying to preserve wealth, but also showing moderate growth. You must have some offense in your portfolio to achieve growth, but it must be intelligently applied.
In my opinion, a defensive approach to investing makes sense for all investors and most certainly for retirees or those nearing retirement. If you try to control risk and avoid terrible bear market losses, you’ll have fewer sleepless nights and your returns can still be consistent enough to allow you to be financially comfortable throughout retirement. Yes, you may miss out on some excitement near the end of a bull market when valuations are extreme, yet making money seems so easy (bubble territory). But if you aim to invest defensively and minimize drawdowns, you stand a good chance of achieving your investment goals.
Under no circumstances does the information in this column represent investment advice or a recommendation to buy or sell securities.
