Golf & Finance: Managing Risk

“Do you see the gap between these two trees? I think I can punch my golf ball between them and have it roll up near the green…”, I suggested to my good friend and caddy Ben. I was having a pretty good round at a local tournament, but I was 4 over par through 14 holes and I knew that to have a chance at winning I needed to be around even par. “You can do it; a low 6-iron should do the trick,” Ben said, as he pulled the 6 iron from my golf bag. I have about 20 feet to the trees ahead of me with about a 10 foot window between them. I take my stance and make a pure stroke.  The feeling was exactly as intended, but I must’ve hung my clubface a little open.  Before I can process it. the ball ricochets off the right side of the right tree and my ball disappears forever! Long story short, I card a 9 on the 15th and my chances of being in the money evaporates. I felt like Jordan Spieth at the 2021 Masters when he found himself in a similar position at Augusta.

Objectively, I knew the risk, so I shouldn’t be upset when one of the potential outcomes happens. But emotionally, I couldn’t help but feel anger and disappointment. I had played a decent round, but it just wasn’t good enough to win.  That’s always hard to accept. But if I were to put myself in that same situation again, I would try to hit that same shot. I was trying to win a tournament. On that day, I had to inherently take more risk to be the best golfer.

Just like in golf, investors must inherently take on risk to have the possibility of a desired outcome. You’re not going to earn market rates on money you’ve placed under the mattress. So you must accept that in order for your money to be in a security that can return 10% in a year, it can also lose 10%, maybe 20% or even 30%. We might be mad or upset when a downturn in the market happens, but that is the risk we take to potentially earn more money. Over the long term, research shows that the reward has been worth the risk if you stay the course and don’t panic and sell when the market goes through a period of decline. We know objectively any year could be a down year. However, it is easy to be concerned about the performance year-to-date. As of January 31, 2022, the year-to-date performance of the S&P 500 Index is -5.86%. So how can you as an investor sleep better at night knowing markets are currently down?

Tip 1: Make sure short-term money is safe money

If you are planning to make a big purchase in the next 6-12 months, make sure those funds are safe from market volatility. You don’t need to expose short-term money to market swings.

Tip 2: Check your current asset allocation and make sure you are well diversified

Different asset classes have different risk and return profiles. Having a well-diversified portfolio and  multiple asset classes in your portfolio, will reduce your overall-risk exposure. While your overall portfolio may still decrease, being well-diversified helps avoid the bigger swings in your portfolio.

Tip 3: Communicate with your financial advisor

At RPJ, we understand the emotions that come with having money you’ve earned and saved be exposed to the volatility of the market. You know objectively that it is the right thing to be doing, but rightly so, it can be hard to be emotionally okay with that reality. Communicate how you’re feeling and we can help “talk you off the ledge.” When the market is down, it is not the right time to be making emotional decisions. We can help you make prudent decisions with your hard-earned money. We will work with you to assess your financial situation and help increase confidence that you are heading in the right direction.

Sources:

1. https://www.marketwatch.com/investing/index/spx

2. https://www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp

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This information is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, security, product or concept. The information contained herein does not constitute investment advice or a recommendation for you to purchase or sell any specific security.  You are solely responsible for reviewing the content and for any actions you take or choose not to take based on your review of such content. You should not treat these materials as advice in relation to legal, taxation, or investment matters.

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