With the Boston Red Sox celebrating their World Series victory, the talk of the town around these parts turned to the unbeaten New England Patriots and focused on the idea of “running up the score.”
En route to an 8-0 start, the Boston football team had scored points in remarkable bunches and kept putting points on the board when the games were out of reach. Whether it was sports-talk radio, the post office, at school or just about anywhere, seemingly everyone was trying to define “running it up.”
In the middle of all of the discussions, it dawned on me that investors love running up the score and don’t recognize the problems it sometimes creates.
In sports, some people define running up the score as simply staying on the offensive and trying to put up the biggest possible number, ignoring sportsmanship, hurt feelings or the possibility that there may someday be a payback.
In sports and investing, my personal definition of running up the score has less to do with points than attitude, as I believe it’s a loss of perspective, leading to actions that show a lack of respect for the opponent.
“People are taught to look at performance in relative terms, as if it was a game where you want the highest score,” says Donald MacGregor of MacGregor-Bates, a Eugene, Ore., firm that researches judgment and decision-making. “Over time, when you think of investing as a game with wins and losses, somebody else’s objectives become yours.”
Typically, you adopt the objectives of the fund manager. Whatever they have planned for their fund is what you sign on to when you fill out the application. You then assume that if the fund reaches its objectives, you will reach yours.
But over time, an individual’s financial objectives are likely to change, while a fund’s targets typically remain the same. You may keep winning the game, but you may be playing the wrong competition.
Says MacGregor: “In time, you become so concerned about the numbers – about beating the market, or doing better than your neighbor, or about amassing some big amount of money – that you get distracted from what you are really after.”
In mutual funds, it happens in several ways.
First, there is the loss of the big picture. In funds, investors often let their winners run, leading a portfolio away from its asset allocation. Culling winners and investing in laggards to stick to the game plan is hard, but anyone who didn’t lock in their bull-market gains in the mid- 1990s knows that letting winners run unchecked and failing to rebalance a portfolio can be costly.
Next, investors make winning their actual goal. For most people, investing in mutual funds is about achieving enough success to live happily ever after. Running up the score means being focused on doing better than the neighbors, where excess returns are seen as the way to live it up.
That manifests itself in holding on to higher-risk strategies too long, rather than becoming more conservative with age.
Finally, investors act like they haven’t scored before. Instead of letting funds do their work and benefiting from compounding, some investors jump around, constantly looking for the next vehicle that they think will get them to the promised land in a hurry.
Says MacGregor: “This isn’t a competition; it’s a journey. Some people get so focused on winning and where they think they are going that they lose sight of where they have been; they’re dissatisfied with their investments, even though they are well on their way to reaching their goals with them.”
Chuck Jaffe: cjaffe@marketwatch.com
