Many of us either fish, or know someone who fishes, and the tendency to focus on the “big one” or “the one that got away”. There is something inherently natural about valuing ourselves for our biggest catch. Perhaps it boils down to a primal need to feed ourselves and our families — and the bigger the catch, the more we eat. But, as I’m sure any honest fisherman will tell you, big catches happen very infrequently. Meaning if you rely on the “big fish” to eat, you may end up going hungry.
The better way to measure your success is the overall number of the fish you bring in the boat. The more fish you reel in, and the more frequently you do so, the more likely you are to feed your family. And the best way to increase your chances of a catch? Put more hooks in the water. Having multiple hooks means you can use various baits and hook sizes, optimizing your chances of bringing in all types of fish.
This principle holds true for investors as well. We seem to overvalue the big wins and undervalue the end-goal of enhancing our long-term return. We focus on the individual holdings that do really well (or poorly) but rarely take the time to think about how each individual holding affects the portfolio as a whole. We focus so hard getting one big win, that we don’t take the time to bait the other hooks.
While baiting multiple hooks (creating a diversified portfolio) doesn’t guarantee a catch on all of them, it does increase the chances that you won’t walk away empty-handed. And this is the single most important aspect of this analogy. While a diversified portfolio may not increase by 100% in a year, it also curtails the possibility of a dramatic decrease as well. Meaning, you will be more likely to have steady returns that “feed” your portfolio continually each year.
As an extra note, you’ll also have to account for the fact that water conditions change. Not everything that works in one season will work in another. Market trends and the economy are a lot like water conditions, they are always changing. It would be foolish to suggest a fisherman bait his hook and leave it in the water forever. Most likely that bait will lose its appeal to the fish and won’t catch anything. It is best practice to reel in your hook, check the bait, and change it out if it isn’t working.
If the thought of baiting multiple hooks sounds like too much work, Precedent Asset Management is an excellent fishing guide. Our investment management processes are based on diversification (we use multiple hooks) and we do extensive research on current market and economic trends (we know the water pretty well), which allow us to provide our clients with consistent long-term results (we’re good fishermen).
If you would like to discuss your portfolio and how to make it work best for you, feel free to contact us.
Patrick Daniels is the Financial Planning Analyst at Precedent Asset Management, serving clients as a fee-only advisor in the Indianapolis, Indiana area and nationwide, through coordinated financial planning and investment management.