As in sports, investing involves setting goals, learning from losses

Your Funds

September 03, 2000|By CHARLES JAFFE

Some friends and I recently played in a lacrosse tournament.

Our Atlantic Sportswear team was a long-term project, put together to pursue one goal, the Lake Placid Summit Tournament. We weren't the favorite to win. Our championship-game opponent was the top-seeded defending champ, with a lot more guys who had big reputations from their bygone college days.

In sports as in investing, however, you learn from your setbacks and keep working toward your goals. Losses show what is necessary for success. Mix in some good luck (which Vince Lombardi once noted is what happens when preparation meets opportunity), and the results often turn in your direction.

That's exactly what happened. Atlantic Sportswear's 13-11 win in the master's division championship game was a personal thrill.

You don't need to know lacrosse to understand that managing a portfolio of mutual funds is much the same as running an athletic team, where the funds are your players and total team effort the key to success. The elements that go into any championship sports team translate directly into the qualities you need as you build an investment portfolio.

To reach your goals, your mutual fund team must have:

Players who handle the bulk of the scoring.

Whether it's sports or investing, someone must put your team in the lead.

As you build a portfolio and set your return expectations, certain funds should be relied on to drive most of your returns. These core selections can be hyper-aggressive or balanced-fund conservative, but their potential determines the kind of score you can put on the board.

Pick those key players carefully. You can build a team with one or two superstar funds - big, proven names with top-of-the-pack track records - or with funds that are consistently above average, if not quite so flashy.

Players to do the dirty work.

Someone must do the little things so that your big guns get their opportunities. In mutual funds, it's your money market and ultra-conservative bond funds that lay the safe, boring foundation for your portfolio.

These funds are not exciting, and their returns are relatively small. Still, the little increments of extra return you get from solid, low-cost, steady-gain players in these roles are crucial to your long-term success.

Players who know their jobs (and don't try to do more). Each fund you pick should have a specific role in your portfolio. Make sure it sticks to that role, or kick it off the team.

If your small-cap fund starts buying big-company stocks, it's not doing the job. Likewise, defensive selections designed to stabilize a portfolio should be dumped if they take on too much risk (as measured by an agency such as Morningstar).

Good back-ups.

In Lake Placid, two of our best players were injured before we reached the final. In fund investing, you have a choice of how many players you want at each position.

Too many funds in an asset class can be a problem; returns for the group tend to flatten out, and you get index-like returns at an actively managed price. That said, many investors like having at least two funds in an asset category, sometimes opting to combine volatile stars with consistent, steady players.

Coaches who put players in the right spots to succeed.

On your mutual fund team, this is your job (or the role of your financial adviser). You're the coach when you build an asset-allocation strategy and decide whether you want to play an aggressive offensive game or take a conservative defensive strategy.

You're also the coach when you make adjustments in the middle of the game, deciding when it's time to try to run up more points to put the game away and when it's time to protect your lead because the game is won.

A game plan and a goal.

In sports, playing the game can be its own reward. That's not true in investing, in which falling short of your goals can mean adjusting your lifestyle forever.

Play the investing game with concrete targets, things you want your money to achieve, and the time frame to reach those goals. Then design a strategy (or strategies, because you might have one plan for college savings, another for retirement and so on) that leaves you feeling confident.

Armed with that plan, you can stay in the game and keep your confidence level up, even at times when the score seems to be running against you. Investing is a game of endurance and patience; the occasional early losses are tolerable, so long as you can reach your personal championship.

Charles A. Jaffe is mutual funds columnist at the Boston Globe. He can be reached by e-mail at jaffe@globe.com or at the Boston Globe, Box 2378, Boston, Mass., 02107-2378.

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