Building an investment portfolio is like building a professional baseball team; one needs to find qualified talent for each uniquely dedicated position.
Imagine if the pitcher or second basemen were missing from the roster. The results would be disastrous. Similarly, for a properly structured investment portfolio, one needs to determine the positions required to maintain proper coverage of the market. Many financial advisors get this backward. Instead of designing a portfolio structure, they simply pick investment managers. The portfolio structure then becomes a mere byproduct of manager selection. This can lead to unwitting and dangerous exposures in the portfolio. By the time the hazard is revealed, it is too late. Money has been lost.
To illustrate, in the late nineties many financial advisors were lured by the “New Economy” and placed significant amounts of their client portfolios into momentum growth investments comprised primarily of high-tech and “dot.com” companies. Just imagine a similar outcome if a baseball team manager put together a team comprised of the best short stops in the league. Although one could argue they had selected phenomenal players, there would be no chance of winning against a more carefully constructed team possessing a diverse array of talent.
Knowing which positions players are expected to play is critical in evaluating their performance. A catcher is not criticized for an inability to throw a 95 mile-per-hour fast ball. A second baseman is not expected to catch a line drive to third. And no one claims that the left fielder is irrelevant just because the ball does not fly his way often. Similarly, with asset class investing, if the market does not go the way of a manager’s investment style we are not concerned. We know that each manager in our portfolio is excellent in his or her area of specialty. So long as each manager maintains position and is consistently disciplined, performance will come when the market presents the opportunity.
The formula for a winning team is selecting top-performing individuals who play well within their disciplines. Balancing individual strengths and individual limitations is difficult, but when done successfully, it is worth the effort. By constructing an investment portfolio that encompasses a diverse array of proven manager strategies and investment styles, we can be sure that it will perform well and compound consistently.