It's spring and the new baseball season is underway. While early season results may have already tempered some expectations, most fans still dream of their team making it to the World Series. But which teams really have a chance of success? And why is a retirement blogger even talking about baseball? We'll get to that in a second.
First, let's consider two baseball teams. One has players at every position with a successful track record, including a mix of power hitters and singles hitters, starting pitchers and relievers. The other team…maybe the talent isn't there, but the manager is pretty sure he can make some clever move at precisely the right time to win games.
Clever tactics can win games, but baseball fans know that a winning season depends on a solid lineup. But what is a solid lineup? What delivers value? What successful track records are likely to be maintained in the future?
Over the last 25 years, the specialized study of baseball statistics called Sabermetrics (on which Moneyball was based) has worked to develop answers to these questions. Separating the signal from the noise in baseball been the subject of intensive research, as have methods of predicting player performance.
One of the most fascinating was developed by Nate Silver, famous for his election predictions, called PECOTA, which scores the similarity of current players against every player in baseball history. These scores are used to forecast a range of potential outcomes for players in the upcoming season. PECOTA digs into the stats and comparisons to identify the small differences that make one set of outcomes more likely than another.
And…what's this have to do with retirement investing?
Sabermetrics and PECOTA illustrate the thinking that should go into your 401(k) investment. Maybe your retirement savings isn't the place for you to prove how clever you are with high risk investments. Try to make choices with a reasonable range of expectations based on the strategic long-term consensus.
Also, think in terms of having a balanced set of skills in your investment lineup. Not every investment should be a high-risk, high-reward equity or a hot sector bet. Great lineups include less glamorous role players, like diversifying fixed-income funds or inflation-fighters like real assets. You should also think about when to protect a "lead" - the valuable nest egg you've accumulated as you approach retirement - by mixing in lower risk strategies, like short duration bond investments.
Target date funds do this for you automatically and they may be ideal for people who do not want to manage their lineup full time. Even if you do not invest in one, their asset allocation offers an excellent proxy for an age-appropriate investment lineup. Compare your retirement portfolio to the fund. Even if you have different ideas about your ideal lineup, the target date fund can help sharpen your own thinking when it comes to your retirement portfolio.