(Originally published in April 2022 Newsletter.)
With summer heating up and the MLB All-Star game just around the corner, baseball is very much on our minds these days. In addition to being America’s pastime, it can also provide important lessons on retirement and financial planning.
Don’t swing for the fences – focus on getting on base.
In 2002, Billy Beane of the Oakland Athletics drafted several undervalued players while letting more established athletes go through free agency. Although widely questioned, these moves paid off: the A’s went on to win the 2002 American League West, and his strategy, popularized by the book Moneyball, revolutionized recruiting in baseball. Beane did this by rejecting the standard of focusing on exciting metrics like Home Runs. He found that the best predictors of player success were slugging percentage (total bases divided by at-bats) and on-base percentage. On-base percentage in particular is a sleeper of a stat. Who brags about taking the most walks in a season? But you’ve got to get on base before you can score, and it turns out consistency is key. Similarly, in financial planning and investing, there are a lot of huge stories that get attention. Who wouldn’t want to have invested in Apple in the 80s? But for every “home run” an investor hits, they will strike out many times over. When planning for a secure retirement, it’s important to make sure that you have income that’s dependable, diversified, in cash, and growing faster than inflation. To do this, we build portfolios with dividend-growing stocks, bond ladders, and other assets with proven track records. By focusing on your retirement on-base percentage, we’re doing what we can to put you in the best position possible to have a successful and fulfilling retirement.
Don’t watch the game.
Beane famously didn’t watch the A’s when they were on the field. He was afraid he’d do something rash if he saw his players or coaches making mistakes. All too often an investor will get upset about a downturn in the market, react emotionally, and make their situation worse. The paper Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors shows us why: after looking at 66,465 households with brokerage accounts, the quintile that traded least frequently realized significantly higher returns than the quintile that traded most frequently.
One game is not a season.
It’s easy to get hung up on a devastating loss, or even striking out when you hoped to get on base. Every baseball player strikes out more often than not. Ty Cobb, who holds the MLB’s record for highest batting average, got a hit about once every three at-bats. Even the league’s record holder for highest on-base percentage, Ted Williams, couldn’t get on base more than half the time.
In the same way that a batter can experience frequent and significant slumps at the plate but still have an excellent batting average, so too does the market often experience major corrections only to trend upward in the long run. Between 1990 and 2020 the S&P 500 yielded an average annualized rate of return of 8.1%, resulting in a more than ten-fold increase. But during those 30 years, there were 13 market corrections greater than 10%, including a 49% decrease from 2000 to 2002 and a 56% downturn from 2007 to 2009. It would be easy to give in to panic in such dire markets, but as we’ve learned from baseball, you need to continue to step up to the plate, maintain a disciplined approach, and do the things that will get you on base