I caught an article on the Simple Dollar yesterday: Investing without Goals Is Like Golfing without a Putter…. It’s a great article (Lifehacker even picked it up) if you want to know the basics of having goals and investing. At first, I thought that analogy of golfing without a putter was brilliant.
Note the words “at first.”
I thought about it a little more and the analogy seemed off. It took me a few minutes to put my finger on it, but I think I have it. When I make it goal, it’s so that I have some direction – so that I know where I’m trying to go. The equivalent of this in golf is knowing where the hole is. Also, how I arrive at that goal depends entirely on the goal. Like with any goal you pick the right tool for the job. In the case of golf, the right tools usually include a driver and a putter. With investing the right tools may include mutual funds or CDs. Setting a goal is the answer to “Where?” while using a tool is the answer to “How?”
The other thing that got me with the golf-investing analogy is that it’s bad to overshoot the hole in golf. I don’t know too many people who are sad that they overshot their goal for an investment… it’s not like you are trying to reach a certain dollar figure. If you have Tiger Woods’ money (even with the sponsors leaving him) then certain goals are almost solved for you. For example, he doesn’t have to worry how he’s going to afford his son’s college education. For the rest of us, that would be a very reasonable goal.
There is a great golf analogy to make with investing though. I hinted at it early. An investment is like a golf club. There are aggressive investments that are essentially drivers. When you are far away from your goal, you may choose to sacrifice a little direction (volatility) to pick up large gains to try to get to the hole quickly. Then there are conservative investments that are like putters. When you get close to the hole, direction is the most important (minimized volatility) thing, not strength.