What a great weekend of football, turkey, family and friends! I hope you had a great one! Football has been on my mind and in honor of that time honored tradition, I wanted to relate our nation’s favorite pastime to investing. Believe it or not, a football roster can teach us a great lesson in diversification. In both football and investing, having a diverse mix of complementary positions can be one of the keys to success.
Imagine if a football team trotted out 11 offensive linemen onto the field or 11 quarterbacks, the other team would likely exploit the imbalance and the play would probably fail miserably. We football fans understand the benefits of diversification. The reason we have different positions is because they are complementary and can all work together to achieve a common goal. It’s the same with investing. Owning several positions from non-correlated asset classes, sectors and incorporating themes like financial planning and tax management can all work together to help you achieve your investing goals.
Below, let’s consider some positions on a football roster and how they relate to diversified investing.
Team owner- You
As the team owner, you’re in charge of the whole operation. All of the personnel from the coach to the quarterback to the other position players are in place to help you reach your goals. Your primary job is to hire the right people. Your most important hire? Your coach. Your financial advisor. You will work closely with your coach to define your goals and to build a roster that is designed to help you reach them.
Coach- Your financial advisor
It is your coach’s job to manage the day-to-day operations of the team and take on the primary responsibility of putting together all of the personnel. Just like a football coach, your financial advisor will work with you to create your financial plan and execute that plan in order to help you reach your goals. The most important position for the coach, and for you the owner, is the quarterback.
Quarterback- Your financial plan, asset allocation
The quarterback coordinates all of the other players to make sure they are working together most effectively to accomplish the goal. The quarterback distributes the football to the skill position players. Without an effective quarterback, the other positions won’t work together properly. Just like with a QB, your financial plan directs how the individual pieces should work together in order to give you the best probability of success.
Offensive linemen- Value stocks, dividend paying stocks
Offensive linemen are oft-overlooked but are arguably one of the most important positions of the offense. Not flashy, a little boring at times, they just do their jobs play-in and play-out. Just like the O-line, value and dividend paying stocks are the workhorses of your portfolio. They are typically well established household names that have matured to the point that they are able to pay dividends to their shareholders instead of reinvesting all of their earnings into the growth of the company. The dividend paying nature of these stocks makes them more defensive and somewhat less volatile than their growth counterparts over time.
Running backs- Growth stocks
Running backs, like offensive linemen are also workhorses on the team. They get a little more glory than the offensive linemen, but their productivity can be a little more volatile. Sometimes they get stuffed at the line of scrimmage but sometimes they can break a big run up the middle. Like running backs, growth stocks are also an essential part of a portfolio. They represent a large swath of the stock market and thereby the economy. They can sometimes be more volatile than their value counterparts but are a good diversifier because they typically perform well at different times than when value stocks are performing well.
Tight ends- International developed markets, world allocation
Tight ends are the utility players on the field, they block, they catch, they run. Tight end’s are good at picking up big chunks of yardage but are sometimes undervalued in favor of more flashy positions like wide receiver. Just like tight end’s, international stocks are versatile and give you access to a wide mix of investments from around the world to help you diversify your portfolio. More than half of the world’s market capitalization is outside the U.S. so it’s important not to overlook this asset class.
Wide receivers- Emerging markets
Wide receivers are flashy, unpredictable, and occasionally have a bad attitude but give you the ability to make big plays down the field. Just like with wide receivers, emerging markets can be an important component of a portfolio but should be used with caution. Emerging markets can be volatile and can experience long periods of poor performance. But, when conditions are favorable, they can make a meaningful difference to a portfolio.
Defensive linemen- Consumer staples, utilities, healthcare
Just like with offensive lineman, defensive linemen often don’t get enough credit. (Full disclosure, I was an offensive and defensive lineman in high school. Just trying to give some well deserved credit to the ‘hogs’!) They are usually not flashy but set the tempo for the defense at the line of scrimmage. Just like with the D-Line, consumer staples, utilities and healthcare are the more defensive sectors of the stock market. These sectors are made of of companies that provide goods and services that people need regardless of economic conditions. Occasionally, when things get really bad, like during the financial crisis of 2008, stocks become more highly correlated and even the defensive sectors can perform poorly, but generally relatively less so than cyclical sectors.
Backups/Second and third string- Mid-cap and small-cap
The second and third string players are the future of your team. They are the younger players that are still developing by watching the experienced players. Often, the improvement of their skills is faster and more dramatic than the veteran starters. Mid-cap and small-cap (that is mid-sized and small-sized) companies are like the second and third string. They are rapidly growing companies that are developing into the leaders of the future. Just like with young football players, smaller companies can make more mistakes and can be more volatile in challenging economic environments. But they have potential for faster growth than their mature counterparts.
Linebackers- Bonds
Linebackers are the steady defenders and are often involved in every play. They can see the whole field and plug the holes when threats come their way. Like linebackers, the bonds in your portfolio are your primary defenders against volatility. They have a low correlation to the stock market (usually), often pay coupons (interest) that help to smooth out the returns of the overall portfolio.
Cornerbacks- Real estate
The cornerbacks cover most of the space on the field (real estate 😉 ), and can pay dividends by preventing big plays. Just like cornerbacks, real estate is a more defensive component of a portfolio. They are typically required to pay out most of their earnings in the form of dividends and often have a lower correlation to other asset classes.
Safeties- Cash equivalents, money market
Safeties are the last line of defense and seek to keep all the action in front of them. Just like with safeties, cash equivalents are an important part of a portfolio. Cash can be a good diversifier and typically holds it’s value over short periods of time when other asset classes are performing poorly. However, Just like with safeties, you don’t want to over-rely on cash. In football, you could field a prevent defense all the time to prevent a touchdown but you will give up big chunks of yardage (inflation in my example) in the process.
Kicker/Punter- Tax management
Sometimes it makes sense to take 3 points instead of trying for 7. Sometimes it makes more sense to play for field position than to go for it on 4th down. The kicker and punter are strategic and help increase your probability of success by focusing on the big picture. Just like with the kicker and punter, tax management can help you win in the long-term. Owning municipal bonds, tax-loss harvesting, Roth conversions etc. can seem like you are leaving points on the board; but in the long-run, they may give you a better chance of winning the game. You should, of course, consult with a tax advisor to discuss tax management strategies that are right for you.
Well, there you have it, I hope that made some sense. I had fun thinking of the analogies!
I talked about some of the more common asset classes, themes like financial planning and tax management and singled out just a few sectors of the stock market. The asset classes and sectors I talked about should not be considered all-inclusive. There are many other asset classes and sectors that are often included in client portfolios that I did not address.
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