By Eric Reich
This week, Kyle McClure, an advisor in my office, wanted to share an interesting analogy on baseball and investing. Go Phillies!
I am an avid baseball fan with a great appreciation for “small ball”. In baseball, “small ball” is the strategy of getting runners on base and advancing them using methods that include: bunting, the hit and run, and steals. In 2022, the game of baseball has changed dramatically and rarely includes the small ball strategy anymore. The game has transitioned to power baseball. All anyone wants to do anymore is hit home runs. Unfortunately, that means there are plenty of strikeouts to go around. I think it’s hurting the game (viewership will agree) and can ultimately hurt your portfolio. What is the connection? Let me show you.
The New York Stock Exchange has been around since 1792. That’s over 230 years of history we can use for reference. As advisors, we often look in the rearview mirror at certain periods of time to gauge how we expect the market to react at certain events. For example, right now we are looking at the history of conflicts and prior rising interest rate environments to try and help our clients navigate through such events. It’s important to note that the market has performed well shortly after most conflicts.
If we have enough data and time, history may show how we expect to perform while investing. The S&P 500 (the index) has averaged a 10.5% return per year since 1957. That is a long track record. Well, what is an index? An index is simply an indicator, sign or measure of something. When you buy an index fund, you are essentially buying the entire market. You hold positions (albeit small in some cases) in every holding of that index. In the case of the S&P, that number is 500 to be exact. Therefore, you can expect a return similar to 10.5% over a given period of time if you purchase an S&P 500 index fund. By owning an index fund, you spread out the risk in your portfolio. If one company in the index performs poorly, you would expect the other 499 to help prop the portfolio up. In baseball, I refer to this as “small ball”.
Buying individual stocks comes with a greater risk/reward proposition. When you own a large share of one company your portfolio is strictly tied to their performance. There are so many factors that could disrupt a stock price. This dramatically increases your risk because all your eggs are in one basket. In baseball, I refer to this as the home run.
Owning individual stocks is like trying to hit the big home run. Every once in a while, you will buy a stock and it will do great. It doesn’t come around often, but when you hit that “home run”, it’s a big boost to your portfolio. However, you can be just as likely to strike out instead of hitting that home run if you picked an underperforming stock. When you buy an index fund, you are playing small ball. Your offensive strategy is diversified by hitting singles, taking the base on balls, or stealing a base. Buying index funds isn’t always fun or exciting, but history tells us this strategy can work. Soon enough I think baseball will return to its glory days if we stop trying to swing for the fences and focus on doing the little things, like singles, steals and bunts.
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Reich Asset Management, LLC is not affiliated with Kestra IS or Kestra AS. The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. To view form CRS visit https://bit.ly/KF-Disclosures.
Eric is President and founder of Reich Asset Management, LLC. He relies on his 25 years of experience to help clients have an enjoyable retirement. He is a Certified Financial Planner™ and Certified Investment Management AnalystSM (CIMA®) and has earned his Chartered Life Underwriter® (CLU®) and Chartered Financial Consultant® (ChFC®) designations.
