I grew up playing baseball, and it was common advice that I needed to hear, “Don’t swing for the fences.” When trying to hit a homerun, you end up taking your eye off the ball, and usually miss hitting the ball entirely. In investing, there is similar wisdom. Yes, it’s alluring to find an investment that makes outsized returns; however, with the allure of high expected performance and concentrated risk comes an uncomfortable possible outcome…you may strike out.
Professional money managers even fall prey to this allure from time to time. This article talks about several pension funds that invested in a “structured alpha” hedge fund that lost 97% of its value this year – I would say that is “striking out.” We advise our clients to build well-diversified global portfolios that match his/her risk appetite to give them the best odds of winning the baseball game (ie meeting your life and financial goals).