The 2021 NFL Draft is here. The draft is a chance for teams to continue their offseason efforts to strengthen their rosters for the upcoming season. For some teams, it’s a chance to rebuild and start fresh. For others, it’s a chance to build on success from last year and become even better.
Investors have long heard the term “diversification” when it comes to building a successful portfolio. It’s recommended to spread your money across different asset classes, factors, etc. to build a properly diversified and balanced portfolio. Too much stock exposure and your investments could be too risky. Too much bond exposure and your investments could be too conservative. It’s a constant battle back and forth of finding the right mix, or the winning formula.
Every investor is different and has different goals for investing, with different methods of how to reach those goals. Every NFL is constructed a little differently as well. They run different offensive and defensive schemes in order to win games.
When it comes to the NFL draft, teams have to evaluate what they already have on the roster and address the gaps to fill out a well-balanced roster. A GM wouldn’t want to overload on just ONE position and neglect the rest of the roster. It would be an awfully risky move to draft 5 quarterbacks in the same draft. Football is a TEAM sport. You need offense, defense, and special teams to be successful.
If you look at the best teams in the NFL, they are extremely balanced on all sides of the football. Some games the offense leads the way to victory. Some games the defense shuts down the opposing offense for a W. And sometimes a game-winning field goal from the special teams was enough to pull it out.
The same goes for portfolio construction and making sure you’re properly diversified. There will be times when the stocks in your account carry the torch. There will be times where bonds make you more money than stocks. And there will be times where you’re glad you had that extra cash on the sidelines (see this week’s episode of the Mullooly Asset Show).
On a more granular level within the stock portion of your portfolio, piling your entire account into one singular stock is kind of like sending just your quarterback, wide receiver and running back out for a drive with no offensive line. Sure you technically COULD gain yards and maybe even score points, but the odds of success are WAY better if you have the linemen in there.
There will be times where growth stocks outperform value stocks. There will be times where international stocks outperform US stocks. Unfortunately, like Michael Batnick wrote in this post, we don’t know when these things will happen.
“We’ve gone from “is value investing dead” to “of course value will outperform” in less than 6 months.”
Instead of trying to time different factors and asset classes, let’s just admit we don’t know and own them all in our own personal proportions.
For NFL teams, it’s important to not focus too much on what has happened in the past, but try and focus more on where the team is going in the future to continue having success. This goes for good teams AND bad teams. Good teams don’t want to become complacent by focusing on last year, and bad teams don’t want to get stuck in their bad habits from past years.
Ben Carlson wrote about this for investors in a recent post. We get so concerned with “fighting the last war”, that we sometimes miss what’s coming in the next one. Overcorrecting from the Tech Bubble and Great Financial Crisis won’t help you fight the next difficult stretch in the market. Learning broad lessons and adapting your rules accordingly will.
One last NFL draft analogy for you.
Good GM’s in the NFL know when to move on. And just like in investing, it’s okay to be wrong but it’s not okay to stay wrong. My beloved New York Jets realized they were very wrong after this season and decided to cut ties with Adam Gase and hire a new coach and bring in a new culture to the organization. We’ll see how it works, but at the very least they identified a problem and took the necessary steps to try and improve.
We need to do the same thing with our investment decisions and financial plans. If you took a wild gamble on a certain investment and it didn’t work out, time to own that mistake, learn from it and move on.
As you watch the NFL Draft tonight, think about how your financial “roster” looks. Is your team balanced, well-rounded, and ready to attack your goals? If not, find a way to fix it!