September means it’s time to start packing up the bathing suits and sunscreen. The days are growing shorter, the hype of the Rio Olympics has faded (Lochtegate notwithstanding), and adults are discussing fake football. That’s right, that annual rite of fall is here, fantasy football!
Which, as it turns out, has a few things in common with investing. What are they? Glad you asked…
RESEARCH – MAKING A PLAN
You wouldn’t just show up to your fantasy football draft without doing any research, would you? No way. You could end up like this.
Before drafting, you need to see what kind of players are right for you. Wide receiver or running back? What round do you draft a player in? What are your league rules?
The same goes for investing. What investments are appropriate for you? Stocks, bonds, or alternative assets? What price are you willing to pay for a security? Which investments are the right ones for your specific risk tolerance? These are all question that need to be asked, and answered, before you invest.
Just as you need a team consisting of different positions, you need to invest in different securities in order to diversify. You do want to diversify, don’t you? Think of asset-class investing as assembling a team of players with different skill sets, all of whom make a unique contribution.
Diversification helps to lower risk by lowering volatility. Lower volatility is great for investing as well as fantasy football. In fantasy football, you never know when a star player could get injured, leaving him on the shelf for the rest of the year. Without proper diversification, you can be left without a decent backup.
In investing, you don’t always know which asset class will perform the best over a period of time. By diversifying, you can be sure you are invested in a variety of asset classes.
Also, you don’t always know when you will need your money. Although you can make a plan, sometimes unexpected events can leave you needing cash. Without diversifying investments, you can be left with a significant drawdown in your portfolio just when you need cash the most.
THE DRAFT – PUTTING YOUR MONEY TO WORK
The draft arrives with lots of hype, but it comes down to following your plan. Don’t get distracted by the hype spewed from ESPN/CNBC. Stick to your plan, draft your players, allocate resources the way you planned to.
Ignore the noise (and oh, will there be noise). It’s easy to chase short term gains and hot tips. There will always be someone who thinks they know better than you, who is convinced that it’s a great idea to draft the entire Eagles backfield. Or your buddy who has a hot tip, and wants you to put 50% of your total wealth into one small cap stock.
But you did all that research and planning for a reason. Stick to your plan, and let someone else chase the risky investments.
If you want, you can allocate a small percent of your portfolio to riskier investments, in much the same way you can take a flyer on a late round pick that has high potential. Since you did not invest a lot in either, it’s not the end of the world if they don’t pan out. You still have some room for upside, while not risking too much on the downside.
MONITORING – REALLOCATING/TRADING
After the draft/investing, it can be tempted to rest on your laurels. And why not? You worked hard, researching and sticking to your plan. Oh, if only it were that simple! Although a significant amount of the work is done, we have a long way to go.
Your investments need to be monitored, and reallocated at times. While easy to overlook, rebalancing is an integral part of investing. When a specific asset class outperforms, your portfolio will most likely have an increased allocation to that asset. Rebalancing can increase returns, while lowering volatility.
Having a plan, and sticking to it, makes it easier to ride out the bad times. In fantasy football, it can be a couple games in a row against tough defenses. In investing, it can mean riding out a recession. Just as one bad game does not mean a player is bad, a down quarter or even year does not mean your investments are bad either. For example, if your portfolio is down 5%, but the overall market is down 10%, your investments are pretty resilient.
Additionally, your needs can change, which will necessitate changes to your investments. For these reasons, monitoring your portfolio is a very important step that should not be ignored.
In fantasy football, winning means you make the playoffs, and ultimately win the championship.
In investing, winning means achieving your goals. They can be a specific goal, such as retirement, semi-retirement, higher education expenses, travel, etc. Or it can be as simple as having peace of mind.