I’ve been watching my Phillies this season and so far, it has been a season to forget. While many have deemed this season to be lost and no longer watch the games, I find myself continuing to watch. Granted my mind wanders as I watch now, but I still watch. While watching a recent game, I was thinking how baseball is a lot like investing. You have to have a long term approach to building a successful team, much like you need a long term approach to be successful when investing.
Most successful baseball teams are built strong “up the middle”. This means that they have a strong defense from the catcher, up to the second baseman and shortstop, and out to center field. With investing, you start off strong up the middle by investing in a solid passive fund that tracks the S&P 500. This type of fund is built with strong blue chip companies that have stood the test of time.
From there, a baseball team works on adding good defensive players at the other positions, while also making sure these players can provide offense. This is why teams tend to go after first basemen that can play decently in the field but can also drive in runs. You need to have an offense as well. A balanced team that can hit and play defense is like a well diversified portfolio. Your other position players should include small cap mutual funds and large and small cap international funds too. You should also mix in value and growth funds too.
From there, a team is looking to build a strong pitching staff, which includes both starters and relievers. Good pitchers can get themselves out of trouble on a regular basis. When it comes to investing, bond funds are your pitchers. Bonds are good at protecting you when the market is in trouble.
A successful team will also have bench players. These bench players are great for specific situations. You have the speedster that can be inserted in the late innings to try and score. You have the switch hitter that can knock it out of the park if need be. Your bench players are real estate and commodities. These two investments can help you further diversify your portfolio and help with your returns.
Of course, building a great team has to be done on a budget (forget about the Yankees for a minute). While it is great to go after the guy who hits a home run every at bat, he costs money. Lots of money. Building a full team of this type of player is going to get costly. Too much for the average team. Likewise for the average investor. That is why you need to stick to low cost passive investments. Keeping costs low earns you a higher return in the long run.
When it comes to investing, you cannot always hit the home run. Sure you may have gotten lucky with Apple or Google, but for the most part, investing is “won” by adopting a long term approach that keeps costs low through passive investing. Baseball is the same way. You always won’t hit a home run. In fact, the odds are against you. So focus less on the glamorous aspect of investing and focus more on building a team that is poised for long term success.