The 2016 National Football League season is finally here. Productivity nose-dives while friendly competition increases between friends as nearly 60 million people across the US and Canada begin their first week of fantasy football. Despite the difference in scale, financial markets and fantasy leagues have some interesting similarities. In a standard league, you are playing against a dozen or so teams to pick the best roster from around 900 available NFL athletes. However, as an investor, you are competing globally against millions of investors who average 60 million stock trades per day and have around 5,000 stocks to choose from on the US stock exchanges alone.
Bargains can easily be found when competing in fantasy free agency, but, when attempting to outsmart millions of investors across the world, it’s nearly impossible to guess right consistently. Even Warren Buffett, the world famous active investor, agrees with that statement. Below are a few more concepts that can be applied whether you are drafting your fantasy squad or managing your investment portfolio.
Diversification is a No-Brainer
It doesn’t help your championship aspirations if you plan to draft a Quarterback with your first four selections in a draft. In a standard league you can only start one, so it makes sense to spread your early picks between the other important positions so you have a balanced, competitive team. Similarly, in your portfolio it’s important to spread your investments among various asset classes and markets. This exposure can also help mitigate some of the risk that comes with being too heavily invested in one individual company or sector of the market.
Be Patient and Stick to the Plan
For both fantasy team owners and investors, it is extremely important to have a solid game plan. Part of my strategy in 2015 was to draft Sammy Watkins, a wide receiver for the Buffalo Bills. Through the first 5 games of the season, he had 1 touchdown and averaged an abysmal 3 points per game. I decided to bail, write it off as a bad pick and release him from my team. Through the final 11 games, Watkins was an elite receiver and dominated with 8 touchdown catches while averaging 86 receiving yards and 12.5 points per game.
The mistake, which is also made by many investors, was letting emotional reactions to short-term performance influence a decision to abandon the plan and, in turn, undermined the opportunity for reaching the long-term returns I was expecting. This is a behavioral bias known as loss aversion, which caused me to try and select a better performing replacement out of the fear I had wasted time and energy on a selection that turned out to be a bust.
Understand the Risks
No matter how much research is done, nearly every year there are players who are projected as superstars, but can just as easily be busts. For instance, in 2015, Eddie Lacy was the 3rd running back taken on average during standard league drafts. Fast forward to his end of the season stats and Lacy was ranked 27th at his position and losing playing time to his back up. In the NFL and the stock market there are no such things as guaranteed winners. This is why it’s important to acknowledge that you can expose yourself to high levels of risk when picking individual stocks, even if you believe you are buying a can’t-miss winner.
An important distinction to keep in mind is the different consequences that come with playing fantasy football for entertainment versus investing money for your future. Not many people would risk their life savings based on how their fantasy team performed throughout the season. That’s why it’s important to make prudent investment decisions or work with a fiduciary adviser who can assist you with planning for your future and help you determine the level of risk you, and your portfolio, are comfortable maintaining.