February 7, 2023 | Category: Investments
What does fantasy football have to do with investing? Well, your “logical explanation” might have caused you to miss this year’s performance of 24-year old quarterback Jalen Hurts, who was drafted by the Philadelphia Eagles in 2020. And it might also cause you to “over-pay” for two-time MVP quarterback Patrick-Mahomes, whose recent Super Bowl ring sure looked tempting.
With the end of the NFL season upon us as we gear up for Super Bowl LVII between the Philadelphia Eagles and the Kansas City Chiefs, both are worthwhile reminders. But let’s examine the latter, because it’s a mistake many investors fall for – selecting the star manager every year.
Fantasy football is a virtual competition where you create a team by compiling star players from other squads. You make trades during the season, attempting to bolster your roster and improve team standings. A critical aspect in fantasy football is to select players that should do well, before they do.
Most fantasy footballers would have loved to have drafted all-pro and NFL MVP Patrick Mahomes, quarterback for the Kansas City Chiefs for this year’s fantasy football roster. After all, based on his recent year’s performance, surely you would want him as your signal caller for your fantasy team, right? Here’s how fantasy football can teach us about investing.
Many investors competitively attempt to beat the market, by using asset managers touting great past performance. These investors believe that these managers will continue to do well going forward. Yet the odds are stacked against the investor who chooses an investment manager to generate higher returns by active portfolio management.
Why? Well, active portfolio management is a strategy that often means frequent buying and selling, compared to simply and passively investing into the overall, broad-based markets with vehicles that track benchmarks.
Fantasy footballers, like fantasy investors, often choose Patrick Mahomes-like managers, with past performance that have exceeded market returns for the most recent year. Yet if and when that manager does not perform well, many fantasy investors shout, “Boo” and look to replace their once revered manager with another one.
To be fair, some active money managers will deliver above-market performance. The problem is you cannot predict, nor can anyone guarantee, that a particular winning streak will continue into the future.
Statistics show that in any given year, upwards of two-thirds of active managers do not outperform the passive, index benchmarks that they are measured against.
You may believe in your ability, much like fantasy footballers, to select and maneuver among active money managers. You may think you can consistently beat the market, instead of simply pursuing an asset allocation-based strategy and passive management, which attempts to closely track market returns.
If so, you must also believe that:
Since the odds are against selecting and switching managers optimally, there is a compelling argument for allocating one’s portfolio via a passive, diversified, long-term strategy.
Jalen Hurts vs. Patrick Mahomes is sure to be great football on Super Bowl Sunday. But your retirement portfolio is not a game.
Now is a good time to contact your Popular Securities Financial Consultant to discuss investment strategies to help reach your short- and long-term financial goals.
Source: Financial Media Exchange
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