What can the NFL Draft Teach Us about Personal Finance
Originally published 3/17/10 at Filife.com
Robert Schmansky, CFP(r)
Though it's still more than a month away, the National Football League draft is the nonstop talk of sports radio.
Given my hometown team's position at the number two pick in this year's draft, speculation is at an all time high. Will they pick the best athlete overall, or the one in a position they most need? Will their first choice be available, or will he already have been taken by another team? There may also be strategizing and offers to trade down to a lower pick.
There are several parallels to personal finance in these speculative times that we can learn from the draft.
Expect the Unexpected
Many things happen before draft time. Even the best laid draft plans are often thwarted by the moves of another team that you have no control over. These are factors we often spend all of our time focused on, despite the lack of control.
Likewise, you might think you know where the economy is headed. You might think the stock you've had your eye on (be it your own company or another) is headed higher. But don't get stuck counting on it! Despite your reasoning, the chances are good things won't turn out as planned. For that reason, come up with plans for multiple scenarios. In investment terms, this is diversification not only into different products, but diversification over asset classes in preparation for multiple economic scenarios.
Build Around Fundamentals, Not Flash
Flashy players are often the fan favorites, but make sure you have plenty of players that are solid in their fundamentals before taking too many prima donnas.
Often, the biggest need for a team isn't the player with the most interceptions but doesn't like to tackle. It's having players at all positions who can do the job. If you are lacking in a certain part of your portfolio, don't just take the best performer, you should diversify in all areas with solid performers.
Just the same, many investors place their hopes in flashy investments to make enough to fund their retirement. Whether it is a gimmicky product you wish you held last year, or the latest asset fad, a plan without solid fundamentals will not go the distance through retirement.
And the Expert Opinion Is…
The expert sports radio hosts in my town are always right, even when they end up being wrong.
But there are always plenty of equally 'right' experts who hold opposite opinions. The same is true of investment and economic experts:
The dollar is dead. The dollar is strong against other currencies.
The U.S. economy will stumble. Or it won't.
Inflation is coming. Or maybe it's deflation.
When the draft experts are predicting a team's picks, they are in as much disagreement as the economists' thoughts on the direction of the economy.
Don't get stuck on what one expert has to say. When the situation doesn't go their way, to their minds they are always either right for the time being, proven right by time, or their memories become a bit fuzzy. Economists are best at explaining why things happened after they happen. When it comes to what they thought was going to happen, they usually have a little less to say.
The same is true of draft experts. They too will tell you about that one scenario from the past in which they were right. They won't tell you about the 99 percent of their other predictions which didn't fare so well. It is human nature not to remember those times when we got it wrong. It's also true with economists predicting markets (and investors' stock returns).
Economist and historian Murray N. Rothbard said the value of the economist to the average businessman is limited to explaining generally truths of the economy; not in predicting its short-term movements. The same could be said for sports experts.
Take what you hear from economic, investment and sports experts with a grain of salt. Chances are good many have an educated forecast, but actual results will be something entirely different, for better or worse.