Hit For Contact, Not Home Runs

As an investor, navigating the stock market is similar to a hitter in baseball. There are typically two approaches when at-bat: hitting for contact or hitting for power. Contact hitters focus on putting the ball in play, getting on-base, and scoring runs on a consistent basis. This leads to steady results.

On the other hand, power hitters focus on hitting home runs. They likely will, but this approach usually results in a lot of strikeouts as well. This leads to highly volatile results – sometimes really good, sometimes really bad. Here is why your portfolio should be hitting for contact:

• Sustainable Growth

  1. Home run-sized investment gains can be lucrative, but the periods where you strike out may interfere with the overall growth of your portfolio. To help illustrate, the table below compares how a home run investment approach may perform relative to a contact hitter’s portfolio.

  2. Large investment gains may seem fruitful on the surface, but the steep losses you are likely to incur in that pursuit will bruise your long-term success. Maximizing investment returns is crucial, but it is equally important to limit losses.

*DISCLAIMER: THE PORTFOLIO RETURNS SHOWN ARE FOR ILLUSTRATIVE PURPOSES ONLY AND ARE NOT GUARANTEED

• Reduce Volatility

  • As highlighted above, the home run hitter seeking larger returns inevitably raises the overall risk of their portfolio. Portfolio return and portfolio risk move together. The greater the return, the greater the risk taken to achieve such returns. When an investor starts focusing on generating consistent returns, the portfolio volatility starts to come down.

• Greater Peace-Of-Mind

  • Investors are prone to getting sucked into market fluctuations, causing a whirlwind of emotions. That volatility can be frustrating, or worse, compel you to make impulsive investment decisions. Reducing investment risk will help mitigate those uneasy emotions and boost peace-of-mind. Maintaining the right mentality and behavior is imperative to long-term investing.

Investors that solely focus on achieving higher returns frequently overlook downside risk. Avoid getting too far out over your skis. Take a step back periodically and assess your risk/return tradeoff. Finding the proper risk vs. return balance will help generate steadier returns, minimize those frustrating portfolio swings, and improve your overall mental clarity.

Joshua J. Baird
Investment Adviser Representative