Selling Financial Sizzle Over Substance

Investing
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By Matt McCoy

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The marketing message for both the golf industry and the finance industry is simple:  Sell the sizzle.

In the world of golf, the sizzle is added distance: what ball or club will help you hit the ball farther.

In finance, the sizzle is performance: who or what product will provide you with the most return.

But will heeding either of these messages increase your chance for success on the golf course or with your financial goals?

The idea in the game of golf is complete each hole in as few shots as possible.  To do so, you’re taught to hit the ball in the fairway off the tee and give yourself a birdie putt on each hole, measured by greens in regulation.  Statistics show that you have a much higher probability of hitting the green from the fairway versus the rough, so you should certainly try to do so.

However, statistics also show that driving distance and driving accuracy are negatively correlated.  To gain distance, you need to give up some accuracy.  So why doesn’t the golf industry market products that take 20 yards off of your drive but increase your accuracy by 20%?  Well, because that doesn’t give you much to boast about in the clubhouse.

The purpose of investing is to reach your goals, period.  Most of us also want to reach our goals by taking the smoothest road possible, that is,  with less volatility.  Think of driving distance in golf as representing investment performance and driving accuracy as representing the path to your financial goals with a smoother ride.   Longer drives and higher returns offer us something to boast about, but are either of those the ultimate key to success?

We know that hitting the ball in the fairway significantly increases our chance of hitting the green, but we still carry the newest and longest driver in the bag and use it every chance we get.  The same is true when it comes to investing.  We know that targeting an appropriate level of return with less volatility will increase our chances of reaching our goals, but the possibility of higher returns is sometimes too tempting to resist.

Is it too much to ask to have both?  Well, according to statistics from the PGA Tour site for 2014, the player who is currently ranked first in driving distance is ranked 105th in driving accuracy.  It’s hard to do both well – even for the pros.

The same is true when it comes to investing.  If you are positioning for the highest possible return, you will most certainly experience more volatility.  Hitting the ball 300 yards off the tee does you absolutely no good if it’s in the trees or water or out of bounds.  At least in golf, you may be able to persuade your playing partners to let you take a mulligan.

We’re told to hit the ball in the fairway, but the industry consistently pushes products that promise more distance off the tee.  We’re told to develop a plan and target the return we need to reach our goals, but competition in the industry seems to focus on higher returns.  Long drives and high returns are great for party conversation, but boring may be better if you want successful results.  Develop a plan that is built around what is appropriate for you to reach your financial goals and find something else for party conversation.