Structure Your Portfolio Like a Golf Course

Thursday, September 10, 2020 12:52 PM | Neal Farmer

"Championship" golf courses are supposed to offer a healthy balance of different holes. The standard configuration is that each nine holes will have two par 3s, five par 4s, and two par 5s per nine holes. This diversity of holes allows golfers to play each hole a little differently and manage their risks appropriately. In a very strange way, this course structure provides an easy guideline for investing.

Investors should always be aiming to build a diverse portfolio that contains assets with different risk levels and potential for growth. In golfing terms, investors should have their assets allocated between par 3s, 4s, and 5s.

Par 3 - Playing It Safe

Par 3s are going to be the safe stable investments that minimize risk and offer higher dividend returns at the cost of growth potential. Most good golfers should be able to make par on a par 3. Typically these are safer holes that don't result in too many double bogeys or worse. You can still get a birdie on a par three but the chances of anything better (a hole in one) are ridiculously slim and should not be expected.

These par 3 stocks are gonna be the General Motors (GM), Home Depot (HD), or Allstate (ALL) of the world. These companies are growing slowly but their massive size and stability offer dividends for consistent income. These stocks might go under par during a good market cycle or over with a bear market, but either way offer far lower volatility than most stocks.

Par 4 - The Meat and Potatoes

Par 4s are going to make up lion's share of your portfolio as these are the blue chip stocks that offer stability with decent growth as well. These holes give golfers a better chance at making birdie and a slightly better chance for an eagle. There are more opportunities here for a missed shot that could lead to a bogey but holding positions in a multitude of these stocks will lead to overall growth in your portfolio even if short-term volatility is a little higher. These are gonna be theblue-chip stocks like Apple (AAPL), Microsoft (MSFT), Chipotle (CMG) and Visa (V) that have shown very consistent growth and are dominating their respective markets.

Investors should be looking for companies they think will continue to dominate in their field going forward and might have avenues for growth into new markets. Compared to par 3s these stocks are more likely to trade with the general direction of the market, in part at least because their large market capitalizations mean they make up a significant portion of the major indices. While this may lead to volatile asset prices during some periods, in the long run these stocks will be some of the best performers as markets continue to climb regardless of market cycles.

Par 5 - Go Big or Go Home

Finally, par 5s are going to be the riskier investments in your portfolio. Par 5s are really when golfers get a chance to let it all out and go big for a birdie and or even try to get an eagle. The problem comes when putting a 110% into your drive results in your ball ending up in the woods or a lake. These stocks are all about trying to find the smaller companies that have big potential, or former high fliers that have a chance to regain their former glory.

The risk here is that for every person who invested into Tesla (TSLA) 3 months ago, there is likely somebody that invested into Hertz (HTZ) before or even after it declared bankruptcy. Investors should have some part of their portfolio into these investments for higher growth and the increased risk is still going to be minimized by investments into your par 3s and 4s.

Finding the Right Balance

At the end of the day the most important part of golf is keeping your score as low as possible over the course of the entire 9 or 18 holes. However, trying to go all out and take big risks to try to birdie every hole is not the best approach for most golfers. Tiger Woods could do that in his prime and there are a few investors who have gotten rich by making a few big risky bets, but the average investor is going to find themselves losing balls all over the course and never wanting to play again. Balancing your portfolio between safer and riskier investments will result in more consistent growth and a significant reduction in overall risk.

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