| 05 September 2005
My six and eight year old boys played baseball for the first time this summer, although it would be a stretch to call it organized baseball. The Cubs wouldn’t be confused with a pro team like the Detroit Tigers (or maybe they would!), but it reminded me of the analogy between building a baseball team and a putting together a mutual fund portfolio.
A baseball roster is comprised of nine different positions and a designated hitter, each with different skills and roles on the team. You wouldn’t want a whole team of Mark McGwires. Even though he was a great home run hitter (juiced or not!) a team of all sluggers would finish last in the standings. Someone has to get on base, advance runners, steal bases and play defense. Similarly, a portfolio should have several different and complimentary funds in order to operate as efficiently as possible.
Defense wins championships. The success of the 1984 Tigers was partly attributable to being “strong up the middle”. This means that with Lance Parrish at catcher, Chet Lemon in centerfield and the double-play combo of Trammell and Whitaker, the Tigers had a strong core defense.
When designing an investment plan defense should also come first. You need to protect your portfolio against large losses before worrying about making big gains. This means having some stable funds such as money market and bond funds. Even aggressive investors should have some non-stock market investments to reduce the ups and downs of the portfolio and to hedge their bets.
Every portfolio should also have a core position in large conservative stocks. These are found in large company funds such as S&P 500 index funds that tend to be broadly diversified and contain mainly blue chip stocks. These are like singles hitters in baseball. They will rarely knock the ball out of the park – but they provide necessary production while playing solid defense.
Once you have established a strong core portfolio of stable funds and conservative stock funds you can round out the line-up by adding funds that play a unique roles such as small cap stocks, international stocks, REITS and high yield bonds. You might even swing for the fences and include a small amount in very aggressive funds such as emerging markets like India and China.
There is no single best mutual fund or type of fund. They all can have a place in a portfolio. The key is to assemble a group of funds that work together like a team. So, to win the investment game - take a lesson from the game of baseball – and build a diversified line-up of mutual funds.
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