What golf can teach you about financial planning

As a game, golf is slow and boring to watch; yet it is addictive to play. This is probably the reason for its limited fan following as compared to more adrenaline pumping games like football or basketball. Unlike other games, where you try to beat an opponent at every stage, in golf you play against yourself – in other words concentrate on your own game. This is because there is no concept of a defense against the shot of your opponent. Ultimately, what matters are how well and near perfectly (perfection being nearly impossible to achieve in golf) you hit your shots to win the game. However, quality and dispassionate coaching plays a crucial role for success in competitive golf.

While golf is slow, it is addictive and it also brings relates to some important money management lessons which will help you to have a better grip on your finances and plan for a better future.

Don't copy others

Golf: A round of golf consists of 18 holes and a tournament can run over three to five such rounds. The tournament result counts the cumulative performance of the player spread across all these rounds and an inconsistent player may have one or two fabulous rounds, but is unlikely to maintain the tempo through all the rounds. Therefore, a consistent player normally emerges the winner.

Financial planning: Learn to read and understand the market yourself and do not try to copy other investors. A financial advisor's truthful and unbiased advice is of essence to take sound financial decisions. Nevertheless, remember that it is your money and you are the best judge to take the final call.

Be consistent

Golf: Professional golfers play scratch or below par, that is, complete a round of 18 holes in 72 strokes (Par 72) or less. In amateur golf, handicapping is a numerical measure that indicates the number of additional strokes, over and above par 72, which the player will take to complete the round. Therefore, a better player has a lower handicap number and weaker player has a higher number. For example, an 8-handicapper is better than a 14-handicapper. Therefore, handicap creates a level playing field for all participants by giving advantage of additional strokes to weaker players. He applies the handicap while calculating the scores as per varying formats of the game, that is, match play, stroke play or stable ford.

Financial planning: Invest through systematic investment plan (SIP) in mutual funds, systematic equity plan (SEP) in direct equity or recurring deposits in fixed income instruments.

Start early

Golf: Most professional players start at an early age and build up their game over years of dedicated practice. Starting early in life affords them certain distinct advantages of suppleness of body to develop a correct swing, availability of long hours of practice due to lesser responsibilities in life, and longer time horizon to understand competitive golf, learn to tackle its stresses and absorb its ups and downs.

Financial planning: Start investing early in life for wealth creation. It provides you a longer period for investment and to understand markets, which in turn helps you to offset the market volatility. By starting early, you learn to stay calm and invest during the intimidating falling markets and book profits during the rewarding rising markets.

Know your limit

Golf: The amazing aspect of golf is that a 300-yard drive or a one-foot putt equal as one stroke on the scorecard. In fact, the short game (played on or within 50 yards of the green) contributes more to your success than the long drives since it comprises more than 60 percent of the game.

Financial planning: Know your handicap in money matters and apply them as per the varying situations. A person acknowledging his handicap of poor knowledge of direct equity investments, then adopts the mutual fund route.

Asset diversification

Golf: When you play a par 5 hole, you try to cover the longer distance with a driver shot and as you come closer to the green, you use shorter irons for the approach shot or a chipper to chip onto the green and finally use the putter on the green. The driver is the least forgiving club and a mistimed or bad shot can land you in the rough or hazard. However, you have chances to recover with your second or third shot. The shorter irons are more accurate and help you to close in with the pin. Finally, to sink the putt in the hole, you require precision and accuracy in speed and line of the putt for which you use the putter.

Financial planning: You must understand the contribution of each of your asset towards meeting your financial goals. If equity giving 12 percent return comprises only 20 percent of your wealth, then fixed income instruments giving 8 percent return but forming 60 percent of your portfolio will contribute more towards your financial well-being.

Managing volatility

Golf: A dilemma for a golfer while playing an approach shot (within 200 yards of the green) towards a green surrounded with sand bunkers or water bodies is whether to attack the pin or take a lay by. In case he plays aggressively to attack the pin and miscues the shot, his ball will land in the bunker or water obstacle from which he will find it difficult to recover or incur a penalty. If he plays safe and takes a lay by, then he uses an additional stroke but can pull through with a good chip and putt subsequently. Golf is a game of probability and the player plays based on his potential to play the shot consistently with reasonable accuracy.

Financial planning: Equity investments are akin to playing the driver shot and used for longer time horizon. A bad investment can put you in rough or tight spot from where you can recover in due course of time. Since the market volatility will not last, probability of negative returns also reduces with time. As you approach your financial goals, you must switch your equity investment to debt or fixed income instruments for stability and capital protection guarantee.

When you approach your financial goals, you must secure the capital from the market risks and volatility by switching it from equity to safer financial instruments. An aggressive investor may continue his equity investment with the inherent risk of capital erosion due to falling markets at the time of meeting his financial goal. A modest or conservative investor who opts for switching may earn lesser returns but will ensure that the capital is available to him in full measure at the time of his choosing. A reasonable period to switch from equity to debt funds is 12 to 18 months prior to the date of financial goal. However, to avail maximum tax benefits through indexation you must hold the capital in debt funds for minimum 36 months.

RULES OF THE GAME

• In golf what matters is how well you hit the shot to win the game
   
• As you approach your financial goals secure the capital by switching it from equities

The writer is a certified financial planner & founder, Maloo Investment and Financial Services