“If you can’t describe what you are doing as a process, you don’t know what you’re doing.”

W. Edwards Deming, American Engineer

Prudent Diversification

April 15, 2020

Sports fans are familiar with the expression “offense wins games, defense wins championships.” Whether it be hockey, football, basketball, or even baseball, the team that comes out on top is generally just as focused on defense as they are on offense. It may seem a tad counter intuitive, given the fact that in all of these sports, whoever has the highest score wins.

Of course, if a team prevents their opponent from scoring more points than them, they win. When framed this way, it starts to make a bit more sense. Too often, in sports, we are focused on “offense” since it tends to generate the most excitement. Sports enthusiasts enjoy witnessing a power-play goal, a lastminute Hail Mary, a slam-dunk, or a walk-off home run – each of which involve the offense.

Professional sports Hall of Fames are filled with skilled offensive players – Wayne Gretzky, Brett Favre, Michael Jordan, Derek Jeter just to name a few. Defensive stars, on the other hand, are fewer and far between. To be sure, they are in there, they just don’t tend to be top of mind players. Their achievements aren’t necessarily making the highlight reels, and as such, they simply don’t get the attention that offensive players get.

A perfect case in point is Dennis Rodman. Rodman played in the NBA from 1986 through 2006 for five teams, and two championship teams – the Chicago Bulls and our very own Detroit Pistons. In total, he was a part of five NBA Championships only a handful of players can lay claim to that.

But there’s more. He is a member of the NBA Hall of Fame and led the league in rebounding a record seven consecutive years, despite only standing 6’7” tall. Even with all these accomplishments, outside of Chicago and Motown, Dennis Rodman is more known for his unpredictable behavior, piercings and crazy haircuts than for his basketball skills.

Without a doubt, Dennis Rodman played defensive minded basketball. His coaches knew he might only score a few points over the course of an entire game, but they also knew he would help prevent the other team from scoring through his defensive and rebounding. This made him a valuable component of the team. After all, when you play with Michael Jordan and Isiah Thomas, as Rodman did, you don’t need to be a point scorer. Rodman’s skills were complementary. To use an investment term, his strengths had a low correlation to the strengths of the other players on his team. With only five players on the court, a successful basketball team doesn’t need five shooters. A diversified mix of skillsets makes for a more cohesive and consistent team.

A strong parallel can be drawn between Rodman’s basketball contributions and successful investing. Simply put – “the sum is greater than the parts.” Just as you wouldn’t want five rebounders or five shooters on your basketball team, you also wouldn’t want a one-dimensional investment portfolio. A mix of noncorrelated components not only provides diversification, but it also creates a smoother ride.

As most investment accounts are earmarked for some future use, such as retirement or your children’s college tuition, the timing of returns certainly matters. Because of this, it is imperative that an investment account is diversified with assets that “zig” while others “zag.” Investments should not be selected simply to maximize returns. Rather, it is equally important to choose investment that can play well together creating a winning portfolio.

The article above is an excerpt from the Q3 Quarterly Market Commentary. Here is a link to the most recent issue. Complete the form below if you would like to get this emailed to you each quarter.

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