Investment Tips with a Historical Twist

Students often complain that history classes contain too many boring names and dates, and in many cases their complaints may be justified. But it's understandable why teachers focus on the details. They're dealing with a vast, sprawling subject, and without those details, history would seem like a jumble of confusing, unrelated events. Certainties such as names and dates can provide a framework and offer clarity.

Most investors follow a similar pattern in thinking about fund investing. Trying to get a handle on a subject as complex as the financial arena can be a daunting task. Therefore, we rely on a few certainties to help us find our footing. For example, we know the difference between value and growth, and we each know our own investment goals.

Or do we? It may pay to keep an open mind about such supposed certainties. In a provocative article in the January 2003 Journal of Contemporary History, historian David Reynolds of Cambridge University explains how some seemingly obvious historical facts, such as the basic details of the 20th century's biggest war, can be challenged. This notion is worth a closer look: It might shake up the way you think about many things.

Most everyone agrees that World War II began in September 1939 when Germany invaded Poland, and that peace came in 1945. But Reynolds points out that the reality wasn't as cut and dried. For example, plenty of historians assert that the Asian part of the war began in the early or mid-1930s with Japan's incursions into China. And in the minds of many Americans, World War II began in December 1941. Pinpointing the true conclusion also gets murky. In Greece and China, fighting continued to rage long after the war had allegedly ended.

Even the name of the conflict changes depending on who you ask. In Britain it was typically called "the war" or "the second Great War"; only in the late 1940s did "Second World War" gain broad acceptance. In Russia, that name never caught on. There, it is the Great Patriotic War. And in China, it is "the War of Resistance Against Japan." All in all, Reynolds says, we risk misunderstanding critical developments of the 20th century "by trying to encompass events in the 'second world war' box."

Hey, that sounds familiar: the dangers of trying to force concepts into a box. Perhaps now the relevance for investing becomes clear. Take those widely used terms "value" and "growth." Thinking of them as distinct, easily identifiable strategies makes it simpler for fund companies to market their wares and for advisors and individual investors to create diversified portfolios. But as my colleague Kunal Kapoor pointed out in his recent article about ownership zones, funds labeled or classified as value can adopt a variety of strategies, and thus can behave quite differently. The same is true for growth funds.

Look at individual companies, too: Not long ago, it was a given that drug companies and media firms were growth stocks and most banks or industrial firms fell under the value rubric. Now  Liberty Media (L) features prominently in the portfolios of committed value managers, Matrix Advisors Value's (MAVFX) top holding is  MedImmune (MEDI), and growth-tilted Brandywine Fund has a big stake in  U.S. Steel (X).

Don't completely disregard the terms value and growth, however. They do provide a useful foundation for understanding a complex field. Just remember that they're only basic-level identifiers that mask what's actually a more flexible reality. Understanding this will help you make better investment decisions. For example, you'll recognize that owning two funds in the same style box, such as large value, is not necessarily a bad decision, as they may be employing very different approaches. And you won't get overly concerned if you see media firms popping up in a value manager's portfolio.

We can also take a cue from Reynolds' point about the difficulty of assigning indisputable starting and ending dates when we're considering our own investment time horizons. No question, it's quite helpful to identify some key goals--such as paying your children's college tuition or the date on which to retire. By having such specific goals, you can tailor your investments to meet those aims. But keep in mind that your investment needs may not confine themselves to your neatly scripted conclusions.

For example, let's say you chose an appropriate mixture of funds, stuck with them over time, and succeeded in paying for your children's college educations. Congratulations! That's undeniably an impressive feat. But is your work truly done? Maybe there's a wedding down the road, a down payment on a house to contribute to, a little assistance when a first job goes bust. Let's see: All of you parents out there who never sent a single dollar to your kids after graduation day, raise your hands. Hmmm……anyone?

That's not meant to be discouraging--not at all. Indeed, just as, its limitations aside, the formal end of World War II really did bring joy and relief to millions of people around the world, reaching specific goals through proper investment planning yields actual, tangible benefits. Moreover, it's extremely helpful to recognize whether your funds follow, in broad terms, value or growth approaches or something in between. Just remember that neither style definitions nor investment time horizons are set in stone. If you keep an open mind about such things, you'll not only win your wars, you'll be better prepared for any unforeseen events that may precede or follow them.