In Golf and Investing, Handicaps Matter

Satyan Malhotra Dr. Ali HirsaAdvisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.

Handicaps are a simple, explainable, and uniformly applicable measure of a golfer’s prowess. The handicap works irrespective of the location (e.g., if the play is at Pebble Beach, a public course or at the Old Course in Scotland). Every golf course is different, complex and littered with a myriad of choices, but the handicap unifies the courses, players, conditions, et al. Investment management is no different. Much like every play on a golf course, financial markets present their unique set of navigation challenges.

We propose a golf-inspired advisor assessment framework with a scorecard, fairway average and handicap as performance measures to quantitatively assess an advisors’ investment performance. The scorecard measures the play-by-play performance of an advisor in relation to a benchmark at each interval of the evaluation period (as in each hole of the course). The fairway average measures the propensity of an advisor to take more or less risk than the benchmark (as in the shot selection for the course layout). And finally, the handicap measures the advisor’s performance across periods that can be looked at as regimes (as different courses or periods).

Our proposed measures not only assess the advisor’s ability to meet or beat the target objective, but also sheds light on the advisor’s approach to the green (pun intended!). Golf greats would know best, but we find that the approach to the greens, as also captured in the scorecards for each hole, is a critical component to a better handicap. As with golf, the lower an advisor’s handicap, the better the advisor’s performance over the evaluation periods.