Your Investment Portfolio Is Not A Fantasy Team

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Like so many of my fellow red-blooded Americans, I love football.  And it probably will come as no surprise that a numbers person like myself also has a soft spot for that special nerdy subset of football all about stats — fantasy football.  The excitement of one of my favorite sports wrapped up in numbers and friendly competition with long-time friends is something that makes football season all the more fun.

If you’re one of the 41 million people who play fantasy sports every year, you know how intoxicating it can be.  That’s great when dealing with a fantasy team with perhaps a few dollars and a trophy on the line, but what happens when the same methods for selecting a fantasy team are applied to your life savings?  As I prepared for my own fantasy draft I was struck by how the two industries of fantasy football and personal investing cater to human psychology in nearly identical ways, and it made me appreciate the mental traps that can easily lead even highly educated investors to make poor decisions.

For the uninitiated, let me sum up the game as simply as I can.  A group of people gets together to select real-life football players to be members of their individual fantasy teams, and they win or lose weekly matchups against each other based on the points scored by their players in real football games.  People like me spend a lot of time researching players to add to their teams, and there are lots of good websites dedicated to breaking down stats and projections.  Take the player page for my league, for example:

Fantasy-Football-Table

This shows the top 20 fantasy players in 2015 ranked by the total number of fantasy points scored, and it’s easy to see how some players would be more desirable than others.  Of course the top players in 2015 may not be the top players in 2016, so the optimum team is a perpetual moving target and impossible to know ahead of time.  Even after the season starts, dropping underperforming players and picking up waiver wire phenoms before they become household names is part of the management process that makes fantasy football such an addictive hobby.  It’s essentially a competitive optimization game where the one with the most points wins but the best combination is unknowable ahead of time.

Sound familiar?  As I was browsing pages like these in the past few days researching who I’d like to draft, I had a moment of confusion where I couldn’t shake the idea that I’ve seen this interface elsewhere.  And then it hit me:

Fidelity-Search

Yes, the player research tools on a fantasy football site are nearly identical to the fund search tools for an online brokerage.  Sorting options by top past performance are equally simple, and dropping or picking up a new player or fund is as easy as a click of a button.

While it’s not like they’re working together, the similarity is no coincidence.  Most brokerages these days are designed to cater to the exact same competitive optimization instinct that fantasy football does.  But when crossing out of the fantasy realm to the real world of finance, that instinct can get us into a lot of trouble.  In fact, many of the issues that pop up for investors can be directly attributed to treating their portfolios like fantasy teams.

 

Constant roster churn

One of the fun things about fantasy football is that you’re never married to a bad decision.  If your first round running back gets hurt in week two or benched in favor of a hot rookie, you may curse the football gods for a moment but that won’t stop you from immediately scouring the waiver wire for better options.  A lot of people take the exact same approach with investing, always keeping one eye on alternative company or fund options using tools just like the one above.

In fantasy sports, there’s no downside to completely turning over your roster every week.  But in investing, the tax consequences of active management like that are huge. How might your decision to drop a player be affected if you also had to hand over half the points the player earned for you up to that date to the league commissioner?  And how would you feel once you realize the player you replaced him with was only a one week wonder?  It’s easy to see how regularly swapping players under those terms would quickly destroy your point totals, but people trade investments in that exact taxation system every single day without a second thought.

What looks like a potential future gain on paper may actually represent a guaranteed loss today.  In the real world, it pays to have light trading hand rather than an itchy trigger finger.

 

Thinking short term instead of long term

In fantasy football, there’s really no long game.  It’s all about week to week performance.  Regardless of his history, there’s no point at sticking with a limping receiver when a healthy option can make you a few more points this week.  And if you took a lot of draft risks and your entire team is a disaster, the worst thing that can happen is that you get to start all over next year with a nice blank slate.  In fact, the latest craze in fantasy sports is weekly leagues that reset continuously and actively encourage risk taking.  So why not go big and hope for lightning in a bottle?

That short-term no-holds-barred approach makes for great fantasy fun but can quickly ruin your portfolio.  Managing a portfolio is not about maximizing the short term gains at all costs with no regard for downside risk.  Preserving and growing your life savings is more like the role of a true general manager responsible for sustaining a winning team culture not for weeks but for decades, and such a culture is not built by constantly changing strategies.  Players come and go, but systems endure.

When you’re building a portfolio, buy the system not the assets.  The top individual performers are guaranteed to change, but intelligent programs will win a lot more than they lose no matter who fills the individual roles.

 

Building an offense but ignoring the team

It’s that issue of roles that really sets apart a football coach or GM from the average football fan.  While the fans love to root for their favorite quarterback, running back, or wide receiver who puts up lots of points, they never really appreciate the All-Pro guard who protected the quarterback allowing space for him to do his job.  In fact, an offensive lineman or cornerback generally earns the most praise from the coach when fans notice him the least.  And defense?  Who really gets excited about defense?  People tune in for touchdown highlights, not deflected passes, so blocking and defense are all but ignored in fantasy sports.

Sadly, this is also completely true in most investing circles.  A bond or commodities fund might as well be a defensive tackle, ignored because they don’t put up gaudy numbers, with too many people having basically no working understanding of the important role they play in a well-balanced portfolio or team.  Would you start a 6-man football team of skill players against a full functioning NFL team?  Of course not.  So why do you treat your investments like that?

Both football and investing are team games very different from the fantasy world.  Instead of putting all of your focus on high scoring offense while ignoring the other roles that matter, build a balanced roster that can compete against anything thrown at it.  Not every asset may be glamorous or sort highly on your historical returns list, but the role it plays may make the difference between a collection of ill-fitting all-stars and a team that knows how to grind out a win even on a bad day.

But then there’s that word — “win”.

 

Thinking it’s all about winning

The degree to which people describe investing in competitive terms never ceases to amaze me.  Whether it’s comparing stocks, managers, funds, and portfolios to one another or simply tracking your portfolio to “the market” and weeding out “under-performers”, it seems the natural tendency for almost everyone is to reduce investing to a scoreboard watching exercise.  People are naturally competitive, and it carries over into all aspects of life even where it’s no longer appropriate.  Constantly updated fund rankings only serve to feed that competitive mindset of never settling for second place.

Yes, numbers matter.  But no, they’re not all that matter and investing is not a competition.  What’s important is not that you post higher returns than the next guy so that you can win a cheap plastic trophy, but that your investments meet your financial needs in a safe and sustainable manner.  Investing is not a game, so don’t treat it like one.  Perfect optimization is not at all required for success, and different strategies can work well for different people.

In investing, learn to accept the amazing freedom of “good enough”.  Be gracious in good years and patient in lean years.  The best outcome is not that you win, but that everyone meets their individual financial goals.

 

Long story short — perpetual competitive score optimization where the one with the most points wins makes for a fun fall pastime but for a miserable long-term investing strategy.  Churning your portfolio, always thinking short term, focusing on individual returns while ignoring the overall portfolio, and constantly keeping score are all unhealthy financial mindsets that may serve you well in the fantasy world but sell you short in the real world.  You deserve better.

So for the fellow fantasy football fans out there, as you prepare for the start of the season take a moment to take stock of what you enjoy so much about the game.  Think about what makes it so appealing, and be very honest with yourself if those same thought processes influence your investing decisions in negative ways.  If they do, take action to educate yourself and handle your finances more like a true GM than a fantasy owner.

Your fantasy trophy may bring you temporary glory, but your wise financial decisions will reward for a lifetime.  Apply the right approaches to each, and you can succeed both on the fantasy field and off.

Enjoy the season!