Being successful at golf—and investing—involves considering the “long game” as well as the “short game.”
Standing at the tee, golfers make decisions on how to play the hole, bearing in mind the entire course ahead of them. Taking risks with powerful swings straight toward the green may result in a good score. However, a more measured approach could be a better strategy to help avoid penalties from various hazards along the way.
Investing also involves careful decision making. Choosing riskier investments to boost account balances or to compensate for a lack of saving could put your money in a precarious position. On the other hand, being too conservative may prevent you from reaching your goal.
In both cases, where you are on the course can help determine how much risk to take.
“A good player who is a great putter is a match for any golfer. A great hitter who cannot putt is a match for no one.”
Ben Sayers
The farther you are from the tee—the longer you have to invest—the more risk you can likely take because you have time to recover from setbacks. When it comes to our retirement portfolios, we believe it may make sense for young investors with many working years ahead of them and comparatively small balances to maintain a large representation in stocks.
The power of high degrees of equity and other risky assets lies in the higher growth potential they offer. This helps combat the key threat of longevity risk—the risk of not being able to fully fund retirement. However, you need to balance these allocations against other factors that can have adverse effects on account balances in the event of market declines, such as market risk and tail-event risk.1
The longer you have to invest, the more risk you can likely take because your investments have time to recover from market drops.
Generally, the closer you are to your goals, the less risk you’ll want to take.
Too much unrestrained power can be disastrous once you’re on the green. Likewise, as your working years draw to a close and account balances are higher, the downside potential of equities can result in large losses that are difficult to overcome. That’s why you may want less equity exposure in your portfolio at age 65 than at age 25 or 35, for example.
A key point is that investments are penalized more from losses than they are rewarded from gains. Why? For every loss your portfolio experiences, you need an exponentially higher return to break even.
Gains and Losses Are Not Created Equal
There are many threats to your financial wellbeing, and the threats change over time. Your investment mix should, too.
Knowing the variety of risk factors and how they ebb and flow over time as course conditions change may help you make better investment choices. Weighing risks and rewards is important for decision making. It’s true for golf; it's also true for investing.
1 The risk of some rare, very unusual, but nonetheless expected event.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.
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