Gambling, betting and investing
Betting on the merits of global diversificationAt Russell, we make a variety of “bets” when we invest our clients’ assets. For instance, we bet that our forecasts, which are a vital part of our strategic asset allocation, will be on target. Currently, we bet that value will beat growth over a cycle and that credit will do better than U.S. Treasuries over the long term. Of course, because of our research, we believe that our bets are better informed than when you put your dollars on black at the roulette wheel. But at the end of the day, they are still a bet “on the outcome of a future event.” But, at the end of the day, they are still a bet "on the outcome of a future event - and we may be wrong." Since the day George Russell, Jr. started Russell’s pension consulting business in 1969, we’ve had one bet in particular that stands out: our bet on the value of investors participating in the emerging trend of globalization. At the time, most of our U.S. pension fund clients had no meaningful exposure to global investments when we started encouraging them to allocate 15% of their portfolios to the stocks of non-U.S. companies. And as the correlation of U.S. and non-U.S. equities has moved closer to 1 over the ensuing 45 years, we have often chosen to resist calls to “get out of the more expensive asset class,” or to “get into the asset class that is experiencing a run.” Instead, we have stuck with our conviction in the value of global exposure.
Drawing parallels: Heads Up Texas Hold 'emIn a way, you could say our global bet is a little bit like a “Heads Up Texas Hold 'em” game between two poker players. In this game, each player starts with two cards dealt facedown that only the player (and anyone watching the television broadcast!) can see. That’s followed by five cards dealt face up in three rounds: the “Flop of 3 cards,” the “Turn of 1 card” and the “River of 1 card.” After the initial two cards are dealt, and in each successive round of dealing, each player has the opportunity to place a bet. The player with the best five-card combination after all the bets are finalized is declared the winner. To examine the parallels between this game and Russell’s “bet” on globalization, let’s pretend that I’m playing Heads Up Texas Hold 'em and:
- I’m dealt the Ace of Clubs and the Ace of Diamonds
- my opponent, unbeknownst to me, is dealt the King of Hearts and the King of Clubs.
The bottom lineMost people associate “betting” with gambling at Las Vegas. But in a way, investing involves a certain amount of betting, too – if you consider that betting means you’re risking a sum of money on the outcome of a future event. The advantage to betting in investing compared to betting in Las Vegas: you can make more informed investment bets than you can gambling bets. Make sure you’re capitalizing on that key difference.
1 Source: Oxford Dictionaries