Seven examples of why investment is not always a zero-sum game

In many regards, one investor’s gain means another investor’s loss. Every purchase is somebody else’s sale, so every successful buy decision is also an unsuccessful sell decision and every successful sell decision is somebody else’s unsuccessful buy decision. Or, at least, that would be true if every investor were chasing the same outcome, and “successful investment” meant the same thing to everyone.

“Success” depends on what you’re trying to achieve

But investors are not all the same: they do not all have the same goals; they do not all have the same definition of what risk is, or the same tolerance for risk; they do not have identical time horizons. And where investors differ in their characteristics, this should lead to differences in the portfolios they hold.

These differences are important for investors because they can be a productive source of value-added without the requirement to be smarter (or luckier) than others. This aspect of investment is not a zero-sum game. All investors can be better off if different characteristics are properly reflected in portfolio choices.

Here are seven instances where investment can be a non-zero-sum game. In each example, two groups of investors may hold different portfolios, each a better fit to their own situation.

Examples of investor differences that may create non-zero sum situations

Investor characteristic Investment category
Tax status Municipal bonds
The interest paid on some municipal bonds is generally federally tax-exempt. These bonds are particularly attractive to taxable investors, so their pricing tends to run high when you look at before-tax yields. That in turn may make them unattractive to some tax-exempt investors.1
Defined benefit pension plans Long-dated corporate bonds
Pension plan liabilities are calculated based on the price of long-dated corporate bonds. Hence, even though for most investors cash is the lowest-risk investment choice (and long-dated corporate bonds are fairly risky), for pension plans cash is risky and long-dated corporate bonds are considered a risk-reducing asset.
Defined benefit pension plans Inflation-sensitive assets
These liabilities (for US pension plans at least) are not typically linked to inflation. Indeed, because inflation tends to mean higher interest rates, inflation may even have the effect of improving the financial position of the plan. Hence, while inflation protection is a desirable feature for most investors, it’s not something that pension plans should pay a premium for.
Domicile Domestic and non-domestic assets
U.S.-based investors have a home currency that is the international reserve currency and a domestic equity market that is over 50% of world capitalization (as of year-end 2015). Investors in other domiciles do not. Currency considerations and non-domestic market exposure are different for investors with different domiciles.
Sensitivity to benchmark risk Managed volatility
Many investors act as if tracking error (deviation from the performance of the market benchmark) is, in itself, a material form of risk. This can mean that assets with competitive return and low absolute volatility are attractively priced from the perspective of an investor who is not concerned about tracking error.
Need for liquidity Illiquid assets
For some investors, it is not feasible to lock up assets in illiquid investments. For others, liquidity is not a major concern.
Risk tolerance High- or low-risk assets
Of all the differences between investors, perhaps the biggest—although perhaps one of the hardest to really get our arms around—is the question of risk tolerance. Few would dispute the importance of risk tolerance in investment strategy.


Peer group effects; culture and history; regulatory constraints; scale; available management resources: the list of differences between investors could go on and on. Any difference between investors which leads to differential attractiveness between investment choices has the potential to create a non-zero-sum game. This type of non-zero sum situation can arise whenever investment goals or investor circumstances differ. And the non-zero sum situation can persist for as long as those differences exist.

In most cases, these differences reflect different risk characteristics, rather than different return characteristics. This is because—tax considerations apart—return is return; how one investor perceives return is a lot like how another investor perceives return. But risk is a different matter; the nature of risk differs greatly across different groups of investor. So it is on the risk side that we find the widest variations in investor characteristics and hence a rich vein of potential win-wins.

One side-effect of this observation is that the case for passive investing (in line with market capitalization) is weaker in all of these situations. When investment is not a zero-sum game, a portfolio that is better for one investor is different than a portfolio that is better for another investor. Either investor would be worse off if they simply invested in line with the market aggregate.

1Income may be subject to the Alternative Minimum Tax as well as state and local taxes.