March Madness college basketball is in full swing, and no matter what team you cheer for, it's an exciting time of year. When I watch many of the games, I can't help but see the strategy behind the game. Believe it or not, there are a number of similarities between a successful sports team and a successful financial plan.
Game management is much like portfolio management, and just as there are nervous parents watching the games, there are a lot of nervous investors watching their portfolios.
Within a basketball team, there are many different positions that play different roles, each just as important as the next. The same is true with a financial portfolio. Various investment vehicles play different roles, and an investor's money should be diversified among them. Think of a basketball team with only point guards on the roster . . . that team would not be very effective, would it? A portfolio should include a mix of investments: some that help an investor capture upside gains, and some that are “safe money” helping to protect an investor from losses.
A portfolio of just CDs might be safe, and a portfolio of all stocks might capture gains, but neither one is an effective long-term winning strategy.
Also, a successful team must adjust to what is happening on the court. If the opposing team is able to make all of their three-point shots in the first half, a team may need to adjust their defense to guard those outside shooters. Or, if a team is winning by a few points in the last few minutes, they may want to slow down their offense and use more time with each possession.
Similarly, being able to adjust the financial game plan is one of the most important tools for a successful investor. Think of it this way: is it smart for those who had significant losses in their portfolio in '08, to simply stick with the same plan moving forward? I would argue it makes sense to make some changes. Learn from what worked (or, in many cases, what didn't work) and adjust the plan to be more successful moving forward.
But great teams owe their success to more than the individual players and their ability to adjust to changing game situations. They also have great coaches and a process that works. I believe that the most successful investors also follow a process. By doing so, most avoid making emotional decisions that often result in mistakes.
Which brings me to my last point, every player must have faith in the engineer behind the process and the game plan: the coach. The coach uses his experience, his expertise and his general game knowledge to design a successful strategy. And the players know that everything the coach does is to help his players improve their skills and win the game. In the world of investing, this same role is filled by a financial advisor. With their industry knowledge and experience, advisors can put together custom game plans to help their clients reach their goals.
It is just as important for an investor to have the same confidence in their advisor that every basketball player has in his coach.
When it comes to your financial strategy, don't ever walk into a game without a plan. The old adage that the quality of your preparation determines the quality of performance hold true here too. Make sure your portfolio is prepared for whatever is coming its way.
This content created by Rick Durkee in conjunction with Fusion Capital Management.