Investment Lessons from the Super Bowl
Are you ready for some football?
This weekend the New England Patriots and the Seattle Seahawks square off in Super Bowl XLIX. While just about every major television network and news publication has analyzed all the X’s and O’s, we break down the big game from the investor’s perspective.
Here are six investment lessons you can learn from the Super Bowl:
Correctly picking outcomes is more luck than skill
Teams that have won the coin toss have gone on to win the 24 times out of 48 Super Bowls. This stat is fitting since the probability of flipping heads in any given coin toss is 50%.
Meanwhile, only 6.87% of actively managed funds were able to perform in the top half of their peer group over a five-year period, according to the December 2014 S&P Dow Jones Indices Persistence Scorecard. That means very few active managers exhibit the skill to consistently outperform. The outcome of a coin flip is random, and this study indicates that the performance of an active fund manager may be, too.
Know when the game is stacked against you
This year’s Super Bowl is surrounded by controversy. The NFL discovered that during the AFC Championship Game, the New England Patriots’ game balls were deflated. Whether or not this was intentional is unclear.
To the Indianapolis Colts, who lost to the Patriots 45-7, it may seem that they were up against an opponent with an unfair advantage, which is how it appears when individual investors compete for gains against other investors that are backed by expensive technology and vast resources. That’s why it’s very difficult to beat the market, as evidenced by the data discussed above. Therefore, investors are better off simply trying to capture returns of the market using low-cost index funds.
Spending is overrated
It’s not farfetched to think several viewers are secretly watching the Super Bowl only for the ads. You can’t blame them. Over the years, the commercials have nearly become cinematic events, with the price tag to boot. This year, a 30-second ad during the Super Bowl costs $4.4 to $4.5 million. Unfortunately for most advertisers, the cost isn’t worth it. A 2013 advertising study found that four out of five Super Bowl commercials failed to get people to buy or generate product interest.
Similarly, when it comes to investments, high cost doesn’t equate to high return. Consider that actively managed funds generally have higher expense ratios than index funds. Yet, according to a Bank of America study, 82% of active fund managers underperformed their benchmark indexes through October 2014 – a 10-year low.
Don’t bet on Boston or Seattle
In Super Bowl XLIX, it’s Boston vs. Seattle. Beantown vs. the Emerald City. Or, based on the major economies in each city, it’s the financial sector vs. the tech sector. Which sector will win in 2015? The table below shows us the yearly returns of both sectors from 2010 through 2014, as represented by the S&P 500 financials and information technology indexes.
Boston vs. Seattle: S&P 500 Financials Index and Information Technology Index Returns 2010 - 2014
Source: Chart by Portfolio Solutions®. Data from Bloomberg Output (1/22/15); total return (gross dividends)
Technology came out ahead in 2014, beating financials 19.9% to 15.0%. However, the financial sector won back to back in 2012 and 2013. In 2011, technology’s 2.4% return bested financials’ -16.9%. Lastly, financials edged out technology in 2010. Like in sports, past performance is no guarantee of future results. That’s why an investor is better off with a broadly diversified portfolio, holding several asset classes and sectors. Diversification can reduce the impact from one investment while improving the probability of earning money in the long run.
Play both offense and defense
A major reason the Patriots and the Seahawks reached the Super Bowl is because each team is exceptional behind both sides of the ball. Both teams ranked in the top 15 in total offense and total defense in the regular season.
In relation, the appropriate balance between stocks (offense) for their growth potential and bonds (defense) for the preservation benefits can help you reach your financial goals. This is known as your asset allocation. To keep your asset allocation aligned and to reduce accumulated risk, it’s important to periodically rebalance your portfolio.
Listen to your coach
The 2015 Super Bowl not only features superstar players, but also future Hall of Fame coaches in Bill Belichick and Pete Carroll. Belichick has won three Super Bowls while Carroll is last year’s winner and a two-time college national title winner. Their success can be attributed to how they help players cope with adversity as much as it can be to their playbooks.
In a recent interview, Belichick quoted former President Dwight D. Eisenhower: “Preparation is everything until the battle starts, and then it doesn’t mean anything.” In other words, a plan doesn’t work without the ability to stay focused and not panic. This can apply to investing as well. Undisciplined investment decisions, selling at the bottom and buying at the top, leads to underwhelming performance. In a 2014 study by research firm, Dalbar, the average investor underperformed the S&P 500 by more than 4% over a 20-year period.
In many respects, investment managers are like coaches, providing the discipline and reassurance to help investors stay the course. Creating an investment strategy is easy; sticking with it over the long term is much harder.
Unlike sports, reaching your financial goals isn’t decided in a single day or single year. It is a long-term process, as your portfolio takes time to grow. The more you let that process unfold, the better. And, watching sports instead of tinkering with your portfolio may be a good way of doing just that. Enjoy the game!