In baseball, home run hitters take big swings at the ball and often miss. However, when they make contact, it can be quite spectacular and exciting. Players who hit for average focus on taking more measured swings and making more consistent contact with the ball with the objective of getting on base, whether by singles, doubles, triples or home runs.
The world of investing isn’t all that different. Investors who swing for the fences can generate amazing returns from time to time but can also experience terrible slumps, sometimes leading to a complete loss of capital. Investors who pursue a batting average approach focus more on balance and compounded returns with a long-time horizon. I’m not suggesting one is better than the other but the batting average approach to investing is more financially and emotionally sustainable.
Similar to swinging for the fences, chasing the best performing funds from year-to-year can be problematic. The persistence of top-performing funds in subsequent years to a strong performance year is spotty at best. Top performing funds in any one year rarely maintain their top performer status over time. While these funds may not be the worst performers in subsequent years, choosing to invest in funds after a strong return year, or even a period of multiple strong return years, has proven to be an unsuccessful investment strategy this century. The best way to invest for batting average is to have a well-thought out and designed plan that you follow diligently. Adjustments can and should be made as warranted but if you’re adjusting your plan every month or even every year it may not provide the balance and consistency you need to be successful in your investment efforts.