Investing Lessons in Baseball Cards

  • No one—not even professional investors with all their resources—knows for sure how any given stock will perform in the future.
  • There are ways to reduce the risk of getting wiped out on one stock: buy multiple stocks or even the entire stock market.
  • It's the same as buying an entire set of baseball cards to get a future All-Star.

DETROIT, MI – APRIL 29: A fan looks at the Trade Wall during the 2023 Topps Truck Tour Promotional event between the Baltimore Orioles and Detroit Tigers outside UnitedSignal Park on April 29, 2023 on trading baseball cards. The Tigers defeated the Orioles 7-4. (Photo by Mark Cunningham/MLB Photo via Getty Images)

Mark Cunningham | Getty Images Sports | Getty Images

When I was a kid, I collected baseball cards with the money I earned mowing lawns. It's fun to open a stack of cards and not know which one you're going to get. Sometimes I'll buy a bunch of cards of a specific rookie in hopes that he'll become an All-Star one day. However, most of the time, I ended up striking out. I learned that the only way to ensure you have future stars is to diversify by purchasing every card in the set.

There are similarities in investing.

Many people are trying to find the next Amazon or Nvidia. But let's face it, no one – not even professional investors with all their resources – knows for sure how any given stock will perform in the future.

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But there are ways to mitigate the risk of getting wiped out on a single stock — buying multiple stocks or even the entire stock market. It's the same as buying an entire set of baseball cards to get a future All-Star. Jack Bogle, founder of Vanguard, used a different analogy to convey the same idea: “Don't try to find the needle, buy the needle in the haystack.”

Looking for a needle in a haystack, he's talking about buying the entire stock market through broad-based index funds, rather than trying to find a handful of winning individual stocks. However, some may argue that only a few stocks are disproportionately weighted in the index, so U.S. stock index funds may not be as diversified as you think.

Over the years, experts have come up with some interesting names to describe the largest or most coveted stocks, such as the “Nifty Fifty,” “FAANG,” and “The Seven.” The latter was the most valuable U.S. company at the end of 2023, accounting for more than a quarter of the S&P 500's market capitalization. It is true that some of today's winners will eventually become tomorrow's losers, but many will also go on to be tomorrow's winners. Some modestly sized stocks will grow into behemoths.

For example, in March 2014, Apple, Microsoft, and Google were among the five largest U.S. stocks, and they remain so 10 years later.Exxon Mobil and Berkshire Hathaway It ranked among the top five in March 2014, but was replaced by Amazon and Nvidia. At the time, Amazon was valued at about $150 billion, while Nvidia was valued at a relatively low $10 billion. Both stocks were added to broadly diversified U.S. stock indexes in 2014 and are now among the top five stocks.

You never know which names will be future All-Stars ten years from now, so diversity is key. Diversification can be achieved at three levels:

Diversify within each asset class. As mentioned before, the easiest way to diversify is through a broad-based index fund or ETF. However, you don't have to stick strictly to index funds. If you choose actively managed funds to complement the core holdings of an index fund, make sure your group portfolio is well diversified and that you maintain costs such as expense ratios and other fees low.

Diversification across asset classes. Diversification into stocks, bonds, and cash further reduces risk. Make sure your allocation fits your time horizon, risk tolerance, and financial goals.

Diversification across time. In most cases, a one-time investment will result in a higher return. On the other hand, while dollar-cost averaging (investing a fixed amount at regular intervals over time) does not guarantee a profit or protect against market downturns, it does reduce the risk of poor market timing. If you set it up to automate your investing, it has the added benefit of being a “set it and forget it” approach. Over time, periodically revisit your plan to make sure it still fits your current situation. Life happens, things change, and your goal assignments change.

Let me state the obvious: all investing involves risk, including possible loss of principal. Diversification does not ensure a profit or protect against a loss; and no specific asset allocation guarantees that you will achieve your goals.

That said, if you diversify, you'll have some potential all-stars in your investment lineup.

— James Martielli, director of investment and trading services at Vanguard.

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