How U.S. Open Winners and Successful Investors Manage Their Risks

GolferonGreen_UniversityoftheFraserV_Flickr-e1434142906600Back in 2006, during the U.S. Open’s final day of play, Phil Mickelson stood on the 18th tee at Winged Foot Golf Club with a one-stroke lead over Geoff Ogilvy, giving him an opportunity to capture his first victory in that prestigious tournament. After a wayward tee shot, Phil, who is known for his risky style of play, tried to carve his next shot out of the woods. His bold attempt for the green caught a tree branch, then a sand trap, and all was lost.

Those of us who watched the carnage live on TV still remember the sinking feeling in our stomachs as Phil gave away a tournament we all knew he so desperately wanted to win. During the post-tournament press conference, when asked about his risky decisions on the last hole, Phil mustered the now infamous explanation, “I am such an idiot.”

Nine years later, and still without a U.S. Open win, Phil will have another opportunity to capture that elusive title next week at Chambers Bay Golf Course in Washington state.

I had the privilege of playing Chambers Bay in a college golf tournament when it first opened. I can assure you it is a daunting course that will present incredible challenges, even for the world’s top players. If Phil is to have a chance at winning this year, he will have to learn from his past mistakes.

So, where did Phil go wrong on the last hole of the 2006 U.S. Open?

The game of golf, like investing, involves strategic risk management. Whether you are trying to win the U.S. Open or set your portfolio’s asset allocation, you must take inventory of your willingness, ability and need to assume risk before making any decisions.

Phil has a tremendous appetite for risk. And aside from his willingness to take the most difficult shots, hisability to execute them makes him one of the more exciting players in the game to watch. However, in the woods on the 18th hole at Winged Foot with a title in the balance, Phil didn’t need to attempt that shot for the green. With a one-stroke lead over his nearest competition, he could have laid-up, made bogey and still had a chance to win the tournament in a playoff.

Phil’s shot from the woods is what we would expect to see from a player who was one-stroke behind the leader and needed to make a birdie, not a player trying to protect the lead.

Instead of attempting to carve his shot through thick forest, Phil could easily have chipped his ball out to the fairway, giving himself a chance to make par for the win or, at worst, bogey his way into a playoff. Instead he chose to take more risk than the situation required and paid the price for it.

When it comes to your investment portfolio, are you invested like a player with a one-stroke lead or a player with a one-stroke deficit and the need to catch up? What approach does your financial situation truly call for? What’s really appropriate to meet your financial goals? It’s imperative that the amount of risk you assume matches not only your willingness and ability to take it, but also your need for it. Just because Phil was willing to take the risky shot from the trees didn’t mean it was the proper shot for the situation.

After the financial crisis of 2008-2009, many investors with what should have been more than enough assets to endow the lifestyle they wanted learned the hard way what can happen when taking an unnecessary amount of risk.

We regularly hear market forecasters attempting to predict the next major market drop, but in reality no one knows when “black-swan” events will actually occur. Black swan events are random and extreme. They deviate beyond what’s normally expected from a situation and are extremely difficult to predict ahead of time, but easily explainable after the fact. Since we can’t know the future, it’s important to set an asset allocation that meets the risk requirements for your long-term, comprehensive financial plan’s success while also allowing you to sleep well at night.

Your portfolio allocation ought to take the least amount to risk necessary to achieve your goals. If your plan has a high probability of success with only 60 percent stocks and 40 percent bonds, why take the additional risk of having a higher stock allocation?

Maybe it’s time to revisit your allocation with your advisor to ensure you are not taking more risk than your plan requires. After all, if you have a one-stroke lead, there is no need to try and thread a shot through the trees when you can safely chip it out to the fairway.

Consider taking this precautionary step now. That way, when the next inevitable market drop does occur, you won’t have to hear yourself utter Phil’s regrettable words, “I am such an idiot.”