Investing seems easy when the entire market is moving up. You can ride the market’s momentum and see some decent gains without really doing too much. But that is both short-term and potentially dangerous.
What are you going to do when it sees 10% swings? 15%? Can you predict bubbles? Can you time when to get out? Probably not. Most experts can’t: that’s why over 70% of actively managed domestic equity mutual funds underperform their benchmarks, and the percentage is even higher for international funds.
Your portfolio must be properly diversified to weather whatever the market throws at you. You cannot just swing for the fences trying to pick homeruns- you’ll eventually find yourself backed into a corner, and most likely at the top of a bubble with nowhere to go but down. You need a disciplined investment strategy.
Your strategy should be holistic and well-rounded – just like… a fight plan in Mixed Martial Arts.
I’ve trained in mixed martial arts for just under 10 years and competed in amateur cage fights, grappling tournaments, and kickboxing matches. I started with wrestling in high school and began training Brazilian jiu-jitsu while I went to college studying economics and sociology. Mixed Martial Arts and the UFC (Ultimate Fighting Championship – namely the sport’s largest and most prominent promotion) exploded into the mainstream around the same time I started training – so I decided to compete.
I soon realized there were a lot of holes in my game. Coming from a grappling/wrestling background, I was getting beat up during boxing and kickboxing training. My trainers forced me to dedicate more time in developing my standup fighting skills until they felt I was well rounded enough to compete in my first MMA fight.
This idea of a well-rounded fighter was echoed in my studies when I was pursuing my CFA designation; portfolios should be holistically and strategically allocated to achieve the best risk-adjusted returns. All asset classes, like the different skill components of a fighter, should fit together – whether it is to create a complete investment portfolio or well-rounded mixed martial arts fighter.
MIXED MARTIAL ARTS AND INVESTING
Mixed Martial Arts (better known as cage fighting) is one of the fastest growing sport in the country for the last decade. Like the name describes, it is a blend of all martial art disciplines. Mixed martial arts practitioners train in boxing, wrestling, Muay Thai, Brazilian jiu-jitsu, Judo, and Karate- pretty much everything.
But the sport has always been heavily criticized. To most, MMA appears to be mindless brutality – that it is nothing more than the modern day version of gladiators in a bar fight. However, to those who are real fight fans and know how to appreciate the competition of martial arts, MMA is a true battle of strategy.
Training starts months before two fighters walk into the cage. They start their fight camps by strategizing with their coaches. They sit down together to watch film of their opponent, analyzing their strengths and weakness, looking for any opportunity to take advantage.
For instance, if you know you are a better wrestler and that they are a better boxer, your best chances for success will be to avoid getting into a fist fight and take them down to the ground. Your fight camp will tailor your training to this strategy and focus on defensive boxing and setting up takedowns from punches.
Once the game plan is decided, training starts. Hours will be spent in the gym developing and refining the fighter’s skill set – sweat will pour, muscles will bruise, blood will be shed. Fighters train up to three times a day when preparing for a fight: a morning cardio-focused workout (where the fighter may go through a circuit routine that consists of sprints, kettlebell swings, tire-flips, plyometric movements, and medicine ball slams); afternoon striking training (where they would drill boxing and Muay Thai techniques); and an evening ground session (that focuses on wrestling and Brazilian jiu-jitsu).
Each camp has a head coach, whose role is to the lead the fight camp. Most camps and gyms have one coach dedicated to each specific discipline/style; there are separate coaches for kick boxing, strength and conditioning, wrestling, and jiu-jitsu. It is the head coach’s responsibility to ensure that training is cohesive, developing their fighter into a well-rounded mixed martial artist; and that all the training fits together towards the same overall strategy.
Now imagine that your opponent is an 800-pound silverback gorilla that is stronger, faster, and has decades more experience than you – the financial market.
How are you going to win this fight?
Against an opponent that seemingly has no weakness; your strategy is the most important aspect to your success. And like a fight plan, your financial strategy must be holistic. Every component of your investment portfolio should complement each other towards your overall financial goal.
EACH ASSET CLASS HAS A PURPOSE
Consider each investment in your portfolio as an aspect of your fight game- your US equity allocation as your kick boxing, foreign exposure as jiu-jitsu, fixed income as wrestling, and alternatives as conditioning. As you must be well versed in all disciplines to be a complete mixed martial artist, you must have a well-diversified portfolio to have a complete investment strategy.
Either by yourself or with a financial planner, you must identify your financial goals before implementing your strategy – just like a fighter needs to devise a fight plan before starting training camp. Your financial strategy will then dictate your asset allocation like a fight strategy will determine what the fighter should focus on.
Say you choose a more aggressive investment strategy; you may increase the weight of your portfolio’s allocation to equities and determine that an ideal portfolio to have something like the following allocation: 35% US large-cap, 10% US mid-cap, 10% US small-cap, 25% foreign, 10% alternatives, and 10% fixed income. The initial implementation of the portfolio is simple; you just buy each asset class up to their predetermined target allocation weight – the challenge is to stay true to your investment strategy.
Your opponent, the market, is volatile and unpredictable; its style and movement cannot be timed. It will try to trick you with sporadic ups and downs to throw you off your rhythm. Experts will tell you they expect the markets to do one thing, and the market will do the exact opposite (or nothing at all). Keeping your long term financial goals in sight will help you stay focused. Being disciplined to your financial strategy will be crucial for navigating through these more testing times, so that fear and overconfidence will not tempt you to deviate from your strategy.
DO IT YOURSELF?
If you decide to manage your own investments, then you effectively accept the role as head coach – and your fighter is your portfolio. Just like it is the head coach’s role to monitor the fight camp, it is your responsibility to make sure that your portfolio stays in line with your overall financial strategy.
In a fight camp, you want each coach to stick with their expertise so that you can effectively coordinate how all of the training will fit together. Otherwise your fighter will be over/under trained in a specific area. For instance, if all of your coaches believe that boxing should be the main focus, and they all train the fighter in boxing, the other aspects of the fighter’s skill set will be neglected. The fighter will then be too focused in boxing and unprepared in other aspects like wrestling and jiu-jitsu. So as the head coach, you must make sure your coaches stay focused on what they are expected to do.
You must also apply this principle of a holistic oversight to your portfolio. It is your responsibility to make sure that your investments fit the allocation as intended – especially with managed assets like expensive mutual funds.
Think of each mutual fund’s management team as coaches, and their investment style as a martial arts discipline. As head coach, your job is to monitor each fund so that they fit into your investment strategy and make sure that your portfolio is not over- or underweight in any area you did not intend. You want to avoid a situation where all of the fund managers are biasedly invested in the same ‘hot’ sector/industry, making your portfolio unknowingly overweight in one area.
But unlike being an actual head coach, you do not have the luxury of actually watching each of your coaches train your fighter. It is very easy to see if your boxing coach gets overly ambitious and decides to teach jiu-jitsu; it is much harder for you to tell if the fund you selected to cover your broad mid-cap exposure has decided to shift focus into foreign small-cap tech stocks. You need a more sophisticated tool that can analyze each of your investments and their underlying holdings to give you deeper look at your portfolio – you need a tool like Personal Capital.
Personal Capital has a sophisticated free app that will give you a holistic analysis of your investments. The dashboard shows an aggregated picture of all of your financial accounts, and can expose the holdings so that you can see your true investment allocation.
Personal Capital has features that can tell you what your overall asset allocation weights are by sector and style, track your portfolio’s performance, and even show you what fees are associated with your funds; it gives you the tools you need to effectively evaluate your investment portfolio so that you can monitor and execute your financial strategy effectively.
There is no better motivation than getting your butt kicked, especially if it is a financial one. Manage your portfolio like you are training a fighter – by being smart, disciplined, and strategic. Use the right tool to get the job done.
Personal Capital will help you answer questions like ‘How are my mutual funds invested?’, ‘What does my overall portfolio allocation actually look like?’, and ‘Is my investment strategy still on track?’
If you do have a financial advisor, Personal Capital can help you see if your advisor is implementing your strategy as expected and what your overall fees are; it will help you answer questions like ‘Are they doing what they say they are?’ and ‘How much is it REALLY costing me?’
Answer these questions now. Make sure your portfolio is ready to fight. Make sure your financial strategy can take on a grappler, a boxer, or any beast in the cage.