Rules of the Game: Avoid Being 'Chopped'

 | May 31, 2013 | 12:00 PM EDT
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The cooking show Chopped has been running episodes with talented amateurs competing recently. If you haven't seen this Food Network program, it normally features professional chefs who vie for a $10,000 prize. The winner survives three rounds -- appetizer, entrée and dessert -- without getting "chopped," or eliminated after one of the courses.

As you might expect, the amateurs -- no matter how accomplished they may be when whipping up a meal for the family or even for a dinner party -- often struggle with ingredients that professional chefs understand how to prepare.

There's no question that we live in a do-it-yourself world. But you probably see where I'm going, when it comes to the comparison between amateur chefs and amateur portfolio managers.

Sure, it's very possible for the at-home trader to profit by riding a growth leader such as Fleetcor Technologies (FLT) or Lumber Liquidators (LL). But trading an all-growth portfolio -- with "spotting winners" as your only intent -- is like limiting your culinary repertoire to desserts and only using ingredients that are on sale!

When I made the leap from trading coach to investment advisor (and it really is a leap, that requires a shift in thinking), my advice was that people have concrete financial goals and needs. These have zero to do with what kind of technical pattern Fleetcor or Lumber Liquidators may be forming, or what kind of gains a savvy trader can enjoy if he or she spots a proper technical buy point.

Is it fun to play "beat the market" with smaller stocks like these? Sure. But I doubt that many people have a financial plan with a portfolio design that says, "Identify high-beta stocks, hope you buy at the right time, don't get shaken out too soon, and then hope you sell at the right time."

Still, it's a lot more exciting to play those games than to do the work necessary to develop a balanced portfolio, hand-tailored to your unique needs. As an advisor, that's what I do these days, rather than gambling that a particular chart pattern bodes well for a buy, sell or hold.

I understand the desire to want to beat a particular benchmark. Of course, the S&P 500 has become the de-facto benchmark that most investors and traders want to beat. But putting aside the impulse to make stock investing like an Olympic 400-meter dash (when it's really more like a marathon, naturally), is the S&P the right gauge to be using?

What about beating inflation as a goal? I regularly give a seminar about Social Security strategies, and there's a striking point embedded in that presentation. As you might imagine, American life expectancies have steadily risen since 1935, when Social Security was enacted.  These days, rather than worrying they won't make it to retirement, more people are concerned about outliving their money in their non-working years.

That brings me back to the amateur chefs -- those guys and gals who can whip up a tasty soufflé or gourmet-style backyard barbecue. They are having fun, dazzling their friends and hopefully giving the kids something they will actually eat.

But they are not professional chefs, accustomed to balancing the various products, using scientific techniques, and understanding the often-complex metrics needed to make appropriate investment decisions.

Trading stocks can be fun. Believe me, I get that. I've done enough of it. But the activity of trading is not tied to a sound wealth-building strategy, such as beating inflation. To accomplish a goal like that, it's far better to have a diversified investment portfolio designed with the appropriate time horizon.

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