As 32 teams are set to do battle to hold the World Cup gold trophy, the team that plays the best across the grueling tournament and has a judicious mix of attack and defence will be the one that will lift the most prestigious trophy in the most followed sport in the world. Football fever catches up with us too, but like the value managers we are, we love to relate everything that’s going on with all things investing. Hence we thought this could be interesting way to explain that investing for the long-term goal is no different from a football match! Let’s see how: In a football team there are 11 players, and they are divided into three sections:
Comprising a goalkeeper and defenders, their task is to ensure that the rival team doesn’t sneak in and put a ball into the net. Going a goal down early in the game usually means an uphill task to win the match. Debt/Liquid funds perform this task admirably in terms of providing a sort of cushion for your investments ,certainly subject to market risk. Without an adequate exposure to debt/liquid, your portfolio could face an uphill task to recover when the equity markets are down. Debt/liquid funds generally tend to help you park your money for the short term. Investors can invest their contingency fund in debt/liquid funds.
The value of a strong mid field cannot be understated. The mid field is the most agile part of the team, mid fielders can attack, providing the forwards with the impetus of an attack, often producing the vital pass that leads to a goal. The mid fielder can also run back and defend, if necessary, taking the ball away from the attackers of the opposite team. Gold can be one of the better mid fielders for your portfolio. Generally negatively correlated with equities (which means the price of gold moves up when equities are down) gold tends play the role of the defender (diversifier) to the portfolio, adding to the ‘attacking’ capability of the portfolio; in other words the ability of the portfolio to beat inflation over the long term.
The players who have the most ‘glamorous’ role in the team are the attackers or forwards, whose responsibility is to score goals for their team and win the adulation of the crowd. The job of the forward is to keep pushing the opposition and providing that main thrust that will carry the ball past the opposition goalkeeper and into the back of the net. Equities, with their ability to deliver the maximum returns with high risk, are the forwards for your portfolio. However in football parlance, there are times when the ‘defense’ is too strong and the markets crash as though poleaxed by a well-aimed tackle. Just like the temperament of the star forward, equity markets are volatile and could win the match for you and could also be equally responsible for the dip in your portfolio value. As an investor the key is to think like a manager of a football team. You need to have a sensible mix of defenders, mid fielders and forwards. Over reliance on defense may ensure that you do not get optimum returns – you may draw the match but not win, which might not be enough. Over reliance on attack could ensure goal after goal, but if the defense is weak then the opponent can match that, again leading to a draw and not victory. You need a perfect mix of attack and defense to win the match. Coming back to investments, investors need to get their asset allocation between equity, debt and gold right. Too much reliance on equity could be detrimental for the portfolio when markets are down, too much debt could lead to even negative net returns if inflation levels are higher than the rates of interest. Hence we would encourage you to ensure that your portfolio has a prudent mix of equity, debt and gold, or investments in a multi-asset fund, which takes care of this allocation for you.
Source: Quantum Mutual Fund