There are a host of parallels between the world of sports and the world of investing — a wealth of performance statistics, endless predictions by brainless pundits, and superstar names that we adore one minute and ridicule the next.
Fantasy football is particularly apt for investing comparisons because you get to pick your own “portfolio” of players each week.
So as you finalize your lineup heading into Week 2, keep in mind these lessons, which can be applied to managing your money:
Do the research: The quality of your team starts and ends with how up-to-date your research is. It’s not just about who was injured last week, but also about knowing upcoming match-ups and taking advantage of them. Investors who simply step into Wall Street and start throwing money around can sometimes get lucky on gut feel, but long-term success — particularly when challenges arise — requires work and foresight.
Predictions aren’t guarantees: Of course, some of the headlines out there are simply projections of what’s expected, not hard facts. In these cases, it pays to have a healthy dose of skepticism and independent thought when crafting either your fantasy roster or your investing portfolio. The quality and trustworthiness of the information source matters, but unfortunately, even the best pundits can be wildly in error when the unexpected happens.
Be wary of fads: In fantasy football, as in the stock market, there are always bizarre breakouts that captivate the masses. For instance, in standard leagues, the No. 2 scoring receiver in week 1 was an undrafted rookie for the Jacksonville Jaguars. But look deeper and you’ll see that the team’s top receiver was injured, and that Jacksonville still is arguably the worst offense in the NFL — so what’s all the fuss about? Every once in a while you might see an unknown stock pop and start to grab headlines. But before you buy, look beyond the short-term trend and think critically about the real chance of success in the long run.
You only have so many roster spots: Along the same lines, it’s important to remember you have a fixed set of roster spots in fantasy sports, so any hot fad has to come at the expense of another position. In the same way, most investors don’t have unlimited liquidity, and choosing a new stock often means you have to cut another position or deploy the limited amount of free cash you had socked away. Economists like to call this the “opportunity cost,” or the price you pay for choosing one option above other opportunities that may serve you better. Finding new opportunities is nice, but there are always alternatives, including the option of simply doing nothing.
Protect yourself and diversify: In sports, as in the market, things never quite go as planned. That’s why it’s important to protect yourself. Some fantasy owners keep the backup to their star player on the bench too, just in case of injury. Others aren’t afraid to keep two QBs on the roster and switch back and forth based on how the season progresses. This kind of agility is an important hedge against the unexpected, and something investors should consider for their portfolio. If your success hinges on a few star stocks driving the bulk of your returns, that’s a dangerous position to be in.
Don’t make excuses for poor performance: Last year, I had Eli Manning as my fantasy quarterback for the first few games. After eight interceptions over just five TDs in the first three games, I had to kick him to the curb. Good thing, too, because later in the season he threw five picks in one game! It’s hard to admit you made a mistake, and when there are no great alternatives, it’s easy to talk yourself into sticking with a loser. But sometimes the poor performers simply don’t bounce back, and waiting patiently for stocks like Radio Shack or Lululemon to bounce back becomes an even worse mistake than simply cutting your losses and moving on.
Don’t gamble your way to retirement: At the end of the day, I’m comfortable with all my fantasy-football foibles because it’s just a game to me. Sure, I lose a hundred bucks or so each year, but I plan my budget accordingly and I’m no worse for the wear. If I treated each league as an income source, plowing in big bucks every season and relying heavily on the chance of my winning, that would be incredibly irresponsible. Investors should view the stock market in the same way because day-trading small-caps or betting on speculative penny stocks can be a fun diversion, but is no way to reliably provide for your family or plan for retirement. The sad reality is that becoming a millionaire picking stocks is much like becoming a millionaire playing fantasy football — possible in theory, but not a practical path for most people. Stick to index funds, and make sure you’re not playing for high stakes you can’t afford.
