Don’t Turn Your Portfolio into the NFL Draft

Browns DraftPoor investment selection can turn your portfolio into a factory of sadness.

The NFL draft reminds me of picking investments.  Lots of hype followed by second-guessing every pick.  It’s nice to acquire new talent, but the key to investing is to avoid a bust.

Don’t Overthink It

Leading up to the NFL draft, the experts on ESPN make and revise their mock drafts on a weekly, if not daily basis.  This is somewhat insane considering that player data isn’t changing that rapidly.  There is no daily combine.  There are no more games.  Similarly, your financial situation doesn’t change enough day-to-day for you to need to remake your entire portfolio.  While NFL scouts obsess over hand-size, vertical leap, and benchpress reps, you will be tempted by newly available financial data.  Sharpe ratios, Greek letters, and max drawdowns are only the beginning of the statistics you can dig up.  Just like the NFL, the minutiae can blind you to overall greatness.

Have a process

Sometimes an investment manager comes along that is so compelling that you want to compromise your process so you can invest.  Resist that urge.  Basic metrics like AUM and manager tenure have saved me from investing in some real dogs.  Sure, the manager has run this strategy in separate accounts for the last 10 years, but he hasn’t run a mutual fund.

Positioned for Success vs Actual Success

I will go out on a limb and guess that the Browns didn’t spend much time looking at left tackles.  Joe Thomas is pretty good (ok, freaking incredible and a terrific Twitter follow @joethomas73).  One line that investment sales people like to use is that a particular manager has positioned the portfolio to take advantage of [rising rates, rising volatility, rise of the lizard people].  They want our clients to sell a fund they currently own and replace it with their product.  Positioning for an event that may never happen (or might unfold in a totally unexpected way) is worthless compared to a manager that actually performs.  Being consistently good is better than perpetually promised potential.

Don’t Draft All QBs

Different assets perform different jobs.  You probably shouldn’t expect outsized returns from your bond portfolio.  Likewise, you shouldn’t rely on an equity manager for protection from a stock correction.

Miami Marlins

I know this is a post about the NFL draft, but as an Indians fan, I will always bear a grudge against the Marlins.  The Marlins won two World Series by assembling talent for a short-term burst of outperformance and then gutting the team.  If the Marlins aren’t playoff contenders, they are deep in the cellar.  Likewise, it is a bad idea to fill out your portfolio with the hottest investments from the last 12 months.  Outperformance may continue for a little while, but it is likely these high flyers will soon fall to earth.  Unlike the Marlins, whose value is propped up by Major League Baseball and greater fool theory, your portfolio’s value can be permanently eroded by chasing short-term performance.

Dance With the One What Brung Ya

One more good investment will add to your portfolio a bit.  One bad investment can put a hole in it.  Sometimes the hardest thing to do is to sit tight with the investments you’ve already got.  As my Old Man would say, “Dance with the one what brung ya.”

Photo by heather0714