What we can learn from World Cup and then apply it to investing

A balanced 4-4-2 formation, a defensive 4-5-1 strategy or an aggressive 4-3-3 stance? There are surprisingly many ways to skin a cat when it comes to investing to achieve our financial goals; similarly there are a plethora of tactics or strategies to win a soccer tournament. If you notice, depending on the opposing team he is currently up against, the team manager tweaks the strategy to adapt, but he will never adopt a formation which makes the team imbalance. Apply this simple mental exercise to your financial formation immediately. But what do we mean by that?

FIFA-World-Cup-2014-Brazil-free-wallpaper

A 10-0-0 formation in investing

Pretty ridiculous right? All defenders, no strikers or midfielders. Don’t laugh, although not practically possible, this is practically what happens when you choose to put all your extra money “investing” into fixed deposits. Figuratively speaking, there is no difference from your elders back in the day where they think keeping cash in milo tins under their bed is the safest option. You save for the sake of savings, not save for investing.

You may tell yourself that, well, while you may score any goals, your opponent is unlikely to score either. So status quo – 0-0, but in investing it is worse. Unlike a soccer league where you get 1 point for a draw, you get zilch compensation for just preserving your capital in investing. With the even persistent enemy which threatens to eat away the value of your money – inflation, you need to grow some and then more to score financial goals.

A 0-0-10 formation in investing

Any team manager in its sane mind would not leave only the goalkeeper as the sole line of defense. Isn’t this a good analogy if we put all of our money into one single asset class or instruments which is likely to generate the highest returns? Simulate such scenario by piling all moneys into the Malaysian stock market in 1997, where the infamous Asian financial crisis hit badly. Within a year, your stocks portfolio value would have plunged to half of what it was. Disastrous, yes? It would be hard to recoup the losses if you need money regularly for household expenses, or to fulfill a major goal like children education.

Some may invests heavily into property – and that also means you are likely to leverage a lot by taking on mortgages. Don’t forget to cover these big liabilities using the cheapest form of insurance available, else it would akin to having the entire team of strikers going on offensive but you are screwed when opponents possess the ball heading to your goal post.

 2014-FIFA-World-Cup-soccer-trophy-jpg

Balancing the Resources

In soccer, you work with limited resources – no more than 11 players are allowed in the field at any one time. Lack of balance spells poor performance. You, as the team manager, need to consider what formation to employ with finite resources. Many might wish they strike the lottery one fine day, but that is not going to happen anytime soon to most – it would be akin to you hoping the rules will change for soccer to play with 22 men instead of 11 per team.

The reason why you need to be comprehensive in financial planning. Get the right risk management measures in place (insurance for debt cancellation and unforeseen medical expenses), then only go for accumulation goals by investment. Investing without managing the financial risks, or buying excessive insurance policies is a sheer act of folly.

Diversification and Asset Allocation

They say – it is fine to put all eggs in one basket and watch it intently. If you cannot be as watchful as you have hoped to be, then some form of asset allocation and diversification is prudent.

I’d want to share with you excerpt from Philip Capital Mangement CIO, Ang Kok Heng memo recently:

The same applies to our equity investment, where we must have different quality of stocks. Our portfolio consists of a good combination of defensive stocks (which aid in reducing volatility) and growth stocks (which will provide strong capital gain). Our flexibility of having a healthy level of cash enables us to retreat for capital preservation and mobilise them when the opportunity arises.

Our investment strategy in the equities market, where most of our investors are now familiar with, we always maintain about 25% cash (the defence) which will ultimately be utilised when the opportunities arise during a down market. We also have about 25% of our position in the blue chips to provide stable returns. However, our capital gains are mainly derived from the circa 50% invested in growth stocks (the forward). Therefore, our blue chip investment acts as the midfielders where we can sell them and invest in growth stocks or increase our cash holding.

Investing in the stock market is akin to entering the football field where we need to be flexible in our strategy depending on the tactics used by our opponents (local and foreign fund managers). Sometimes we need to strengthen the defense (by increasing holdings in cash and blue chips) but when the opportunities arrive, we will be more offensive i.e. by turning more aggressive. 

In the quest to score more gains, we will continue to study our opponents (flow of money) and the internal strength of our players (the quality of the stocks we held).

Do not be Complacent

World-Cup trashing of Spain 1 goal (former 3 Cups champion) by Holland 5 goals is a sobering reminder that no individual, team, business or nation can afford to stay complacent no matter how great they were before. Everyday is a reset for excellence. – Ken Chee, MIP

Robin van Persie netherlands spain wonder goal

Robin van Persie wonder goal

Something to remind ourselves – getting an outstanding return on our investment for the past quarter does not mean we shall rest on our laurels going forward.

Unlike a soccer game, where all wasted minutes do not get returned to you in the form of injury time. Don’t procrastinate if you are reading this now. See how an independent financial adviser can help HERE

Adapted from Personal Money’s June 2014 – Simply CJ – Ball-ancing Act and PCM’s from the Desk of CIO

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