Nowadays, when it comes to sports, we live in a world driven by statistics. Professional teams employ staff whose sole purpose is to pour through numbers and various metrics to determine player suitability, efficiency and expected performance. Using these advanced metrics was made popular by Bill James for baseball but has spread to all major sports. Growing up in a pre-internet world, I remember pouring over the sports pages studying box-scores to see who won each game and how my favorite players did in the game the previous evening. In fact when we heard the thump of the newspaper as it hit the stairs, the cry of “sports” rang out. Whoever called “sports” first got to read the section before anyone else. Well now the first thing in the morning my boys do when they wake up is check their phones and see how they did in fantasy sports. They couldn’t care less who wins or loses, it’s all about how many fantasy points each player scores. They drive their sisters and mother crazy as they spend hours lying on the couch and all they talk about are potential trades. A typical conversation in our home between the hours of 6-9pm goes something like this: “I’ll give you Lebron and Sabonis for Jokic. What? Are you crazy? Sabonis is trash, I want Beal and CJ.” It goes on like this for hours. I guess we should be happy that they communicate with each other!
This Sunday night is the Super Bowl. The advantage of living in Israel is that the big game starts at 1a.m. That means beef hot dogs, wings and Mexican flavored Doritos at around 2a.m! Just writing this and I’m already getting that queasy feeling. By far the biggest storyline is whether six-time Super Bowl champ Tom Brady can lead his new team, Tampa Bay, to victory and capture his record seventh championship. How cool is it that he will be competing with athletes who were in diapers when he won his first title.
Brady is the opposite of the current preoccupation with metrics and statistics. He isn’t a great athlete, not flashy and obsessed with his own numbers. Rather he is an incredibly hard worker, and most importantly, he is a winner. He cares about winning championships. No advance metrics can measure that. As I’ve written previously, I know that it’s not popular to say outside of the New England region but I really like Tom Brady. For Brady it’s all about the team and winning. As he said, “I just love working hard. I love being part of a team; I love working toward a common goal.”
It’s his love of team that I would like to focus on vis-à-vis your investments.
Football is the definition of a team game. There are three aspects to a football game; offense, defense and special teams. If even one of those three is weak, the chance of success is limited. In other words, you need a diversified team approach to achieve ultimate success.
It’s this same diversification that is key in managing risk in your investment portfolio.
There are those professionals who believe diversification is the magic sauce for insuring that you won’t lose money. Well that is just not true. Investors who diversify can lose money just like anyone else.
According to Morningstar, “Having a diversified portfolio doesn’t mean you’ll never lose money. Diversification doesn’t mean complete protection from short-term dips or market shocks. Diversification does not guarantee that if one investment goes down another investment will go up-it isn’t a seesaw.”
What is diversification? It is an investment approach that uses many varied investments within a portfolio. The theory states that a portfolio of different kinds of investments will, on average, yield higher returns and pose lower risk than any one individual investment. It is a way to smooth out volatility in a portfolio caused by market, interest rate, currency and geopolitical risks. In layman’s terms, don’t put all your eggs in one basket. Just go back to this last Feb/March at the beginning of corona when markets crashed, to see that while diversified portfolios also lost money they fared much better than concentrated portfolios which got killed.
The whole point of diversifying is to lower risk in a portfolio. For most investors a slow and steady approach is the path to financial success.
After the corona-inspired market drop and then the strong snapback, now is a great time to review your portfolio and see if you are too heavily weighted in just a few investments. If so you may be able to benefit from proper diversification, to help improve returns and lower your risk.
The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.
Aaron Katsman is the author of Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing. www.gpsinvestor.com; [email protected]