When to pull the goalie

A ubiquitous commercial for a robo-advisor shows a client pointedly telling his advisor that his investments aren’t a game. While there’s no debating that, the return of hockey this month provides an opportunity to consider investing through the lens of our national pastime.

AQR Capital Management co-founder Clifford Asness and New York University math instructor Aaron Brown published a paper in March relating investing to pulling the goalie in hockey. Pulling the goalie allows a team to add a sixth attacker while leaving its own net empty. The authors argue this doesn’t happen nearly enough.

When a team is behind by one goal, they write, coaches should pull the goalie with five minutes remaining in the third period, rather than at the one-minute mark common in the NHL. If their team is behind by two, the goalie should be pulled with 10 minutes left—which is unheard of.

In addition to advising hockey coaches, Asness and Brown have lessons for investors about evaluating risk and challenging conventional wisdom.

First, on risks: the authors make the case that it’s easy to focus on the wrong ones. Pulling the goalie adds volatility. Opponents are four times likelier to score in an empty net, while the team with a sixth attacker doesn’t even double its chances of scoring. Naturally, it’s a strategy only executed in desperation.

But the team’s objective is broader than the goal differential, the authors argue. The trailing team gains a lot if they score (they’re tied and get a point in the standings, and a chance at two points if they can win the game) and loses little if their opponents score (they were losing anyway). Coaches scared of falling farther behind are focused on the wrong risk.

In the investing context, it’s like overemphasizing the risk of an individual investment. Adding a volatile but uncorrelated investment can even reduce the portfolio’s overall volatility. Canadian regulators are accepting this approach, as seen in proposed amendments to NI 31-103, moving toward an overall portfolio-level suitability analysis for a client’s best interest rather than a trade-based one.

Jason Pereira, partner at Woodgate Financial Inc., says the hockey analogy may be “a bit of a stretch” but he agrees clients are often preoccupied with individual investments rather than broader goals.

“Too often, clients get obsessed with trying to win on every investment, even if it means selling off things that they think are losers that serve a purpose,” he told Advisor’s Edge.

There can be a disconnect between the immediate score (the market today) and the long-term standings (financial goals). The risk changes based on the objective.

Risk also has a time element. Investors commonly “focus on the volatility of their portfolio rather than the probability of an unacceptable level of return over their risk horizon,” the paper says.

Michael Batnick, director of research at Ritholtz Wealth Management in New York, addressed this in a March blog post by analyzing returns of stocks and bonds over a 45-year period. One dollar invested in five-year Treasurys was worth $1 after 45 years. One dollar invested in the S&P 500 Index became $18 over the same period. The worst calendar year for bonds over that period was -1.3%; for stocks, the worst 12-month period was -39%. Investing in bonds is safer in any given year, but the long-term returns are inadequate. He asks: Risk now or risk later? For retired clients who need their nest egg to last another 30 years, risk now might be required.

Pulling the goalie also offers a behavioural lesson. Asness and Brown quote John Maynard Keynes: “it is better for reputation to fail conventionally than to succeed unconventionally.” Hockey coaches are rewarded less for winning than for being perceived as good coaches. Pulling a goalie in the final minute and losing 2-1 is defensible. Pulling a goalie with five minutes to go and losing 4-1 is harder to explain.

In an episode of his “Revisionist History” podcast, journalist Malcolm Gladwell put the paper in the context of agreeable and disagreeable personalities. Coaches (and investors) who don’t need approval—the disagreeable ones—are better at challenging orthodoxy.

But can an advisor be disagreeable? Perception matters in this industry at least as much as it does for hockey coaches. Most clients want to think their advisor is doing a good job, and not getting fired is a natural preoccupation for advisors.

“If performance is mediocre and in line with markets, there is less chance of being terminated than by taking bolder action to succeed within the time constraints of the client,” Mark Yamada, president of PÜR Investing, told Advisor’s Edge.

Being disagreeable can cost an advisor clients or prospects who will go searching for someone who’ll tell them what they want to hear.

But bluntness should be appreciated, and it often will be when clients are forced to focus again on the overall standings, or their investment goal. For some clients, putting it in hockey terms might even help them get there.

Mark Burgess

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Mark was the managing editor of Advisor.ca from 2017 to 2024.