How fantasy football makes you a better investor(Read article summary)
The strategies used to dominate fantasy football leagues can also make you a better investor. Theses three tactics can lead to success in your league and in your finances.
Millions of Americans, myself included, play fantasy football each year. People are attracted to the game for various reasons. Many people like the experience of building and managing a team and the competition involved. I enjoy it because not only does it create a deeper connection to a sport that I love, and the friends and family I play with, but it can also teach us about another passion of mine: financial planning.
Beyond the fun of the game, the strategies players use during a fantasy football season can yield important lessons about financial planning and investing. Here are a few tried-and-true fantasy football tactics that can help you score big with your investment portfolio:
1. Limit hometown bias
If you’ve ever participated in a fantasy football draft, you’ve probably seen hometown bias in action. Remember that league mate who grew up in Miami and dresses for the draft head to toe in Dolphins gear — let’s call him “Dolphins Fan.” The draft starts and he’s sitting pretty with the third overall pick. “Tannehill!” he yells, punctuating his pick with a triple fist-pump. He may be happy to have drafted his favorite Miami Dolphins player, but he’s also limited the scoring potential of his roster by selecting Ryan Tannehill so early in the draft. You cross Tannehill off your cheat sheet, where he was ranked 159th, knowing that Dolphins Fan’s chances of competing for a championship just narrowed significantly.
Fantasy football is supposed to be fun. While having your favorite hometown player score points for your team feels good, winning feels even better! You’ll have a higher probability of success if you set aside hometown bias in favor of implementing an objective, data-driven approach to roster construction — which includes the entire universe of available players.
Hometown bias isn’t limited to fantasy football. As a financial planner, I see it often with investment-portfolio construction. Many investors make the mistake of limiting their investments to only one country — their own. Under most circumstances, an investor should consider adding an allocation to international and emerging markets (both equity and bonds) to create a globally diversified portfolio. Potential benefits of this strategy include lower correlation, less volatility and higher expected returns. This strategy will allow you to continue to root for the home team, with the added benefits of participating in global economic activity.
2. Understand the rules
Successful fantasy football players know it’s absolutely essential to understand the scoring system and general rules of your league. Certain types of players may be valuable under one scoring system and marginal in another. For example, if you have a limited number of transactions you are allowed to make per year, you will manage those transactions with much more care. The boundaries of your league factor immensely into how you should construct and manage your roster, and will ultimately dictate the success of your team.
As an investor, you also need to be clear about the rules, policies and limitations of the types of accounts in which you invest. For example, if you actively participate in an employer-sponsored 401(k), you should be familiar with the structure of that plan. What are the contribution limits? If your employer matches your contributions, you should know what it takes to maximize the match, what your vesting schedule is and what happens if you leave your employer. You should also understand what tax implications you may need to consider.
Understanding the types of plans and accounts in which you invest and what is available to you allows you to take full advantage of the benefits and avoid costly pitfalls.
3. Don’t overreact
It’s easy for fantasy football managers to get caught up in the hysteria of weekly performances. Managers often overreact to under- and overperformers, especially early in the season. Making drastic roster moves based on short-term performance can be detrimental. The season is long, so think hard about dropping or trading high draft picks or sleepers based on a week or two of performance. Successful managers demonstrate discipline by sticking to a strategic plan developed prior to the season.
Demonstrating discipline is also a key factor to the long-term success of your investment portfolio. Market volatility (risk) across asset classes is common and expected, especially over a short time horizon. An investor should build a portfolio that strikes a balance between comfort and need, with a focus on achieving goals.
Assuming you’ve built your portfolio to meet your short- and long-term goals, you should base changes on careful evaluation, not on impulse. Impulsiveness leads to bad decisions like selling low during a downturn and buying high during an upswing, and can be expensive (trading costs, taxes and missed opportunities). Sticking to your well-developed, long-term strategy will afford you the opportunity to make sound strategic decisions, such as structured rebalancing (systematically selling high and buying low) and tax-loss harvesting.
Remember the object of the game
Winning at fantasy football usually means you end the season with pride — and sometimes a prize. Winning the investment game helps you score a more financially secure future and maybe even the kind of retirement that’s fit for a gridiron champion!
This article first appeared at NerdWallet.