In the baseball world, the on-base percentage (OBP) statistic tells us how often a player makes it safely to a base. That’s important because only base runners can achieve the ultimate goal for their team: scoring runs. In the “good ol’ days,” the top OBP players were guys like Babe Ruth, Ted Williams, and Lou Gehrig. Nowadays this elite crew includes players like Todd Helton, Albert Pujols and Manny Ramirez. Though having a great home-run hitter on a team can make for a very exciting inning, you often find home-run hitters are also very likely to strike out.
In the investment world, that home-run-or-strike-out mentality usually leads to poor long-term performance–primarily because it is a high-risk/high-reward approach (aka, greed!). A better strategy for your investments? Diversification, or spreading your assets out over a wide variety of different types of asset classes, such as cash, stocks, bonds, real estate, commodities, and international investments.
Think of it this way: which four batters would you rather have, Team A or Team B? For Team A, the lead-off batter hits a home run. But then the next three batters strike out. Emotionally, Team A is initially very exciting! But then imagine how your excitement would fall dramatically as the rest of the inning goes nowhere. Team B on the other hand, when it comes to bat, just consistently hits singles—not so exciting but very effective. Each time has scored 1 run, but Team B has the bases loaded and no outs!
Diversification is kind of like the tortoise or the hare type approach to investing. You don’t get flashy with diversification (home runs), but you don’t hit bottom either (strike outs). You do get slow, steady solid returns over time, which is what most investors really want in the long term (particularly retirement investors looking to maximize their retirement readiness). To see one diversification approach I recommend, read https://integrityplanner.wordpress.com/2012/01/19/the-4-x-14-portfolio-tm-updated-for-2011-returns/ It has a great on-base percentage track record!