Why Investing is like Hockey
As a Canadian and a contributor to this site on Investing in Canada, you’ll guess that two of my great loves are hockey and investing. While playing hockey I was thinking about how winning in hockey is similar to winning in the market. Here is some advice I would give to both a hockey player and investor.
Make a bad play? You need to shake it off and get back in the game.
Sometimes you pass the puck in front of the net and the other team scores. And sometimes you pick a bad stock or buy when you should be selling. If you let those mistakes weigh on you, you are going to get off your game and not follow through on your game plan. You might take more chances on the ice and in the market to make up for your mistake. Remember that everyone makes mistakes; the key is to shake it off, forget about it, and stick with the game plan to ensure long term success.
Invest for the long term
Teams draft 16 year olds, often knowing they won’t come into their prime until they hit their 20’s. They might have to wait several years and not know if their investment is going to work out, but time has shown again and again that investing in these young players is going to pay off over the long term with tomorrow’s superstars. The same is true in the market – we stress on this site that your goal is to always think of the long term – make investments that have been shown to be effective over time. Those investments today will yield dividends in the form of a stable financial future.
Risk/Reward changes at different times
Pulling the goalie is a risky move. A study in the Journal of Quantitative Analysis found that 30 percent of the goals scored when the net was empty were tallied by the attacking side. That means 70 percent of the goals were scored by the defending side, effectively ending the game. And since goaltenders are often pulled in the last minutes of 2 and sometimes 3 goal-margin games, a goal by the attacking team doesn’t always lead to a tie or eventual victory in overtime – it can still lead to a loss. So, not surprisingly, pulling the goalie is not usually done until the final minute or two in the game where there is little to lose and it is done very rarely.
The same is true with investing. You should avoid investing in very risky assets unless it is done very rarely and with a small part of your discretionary assets. In addition, as you get closer to retirement, your risk tolerance should diminish, and you some move to more conservative investments. In investing, like in hockey, you need to take more risk only at appropriate times.
Balance is Key
A great offense without a great defense or a great goaltender might be entertaining but won’t lead to a Stanley Cup victory. Great teams are balanced. Similarly, investment portfolios must be balanced and diversified with stocks, fixed income securities, cash and other assets. While owning only stocks might be exciting (similar to having a great offensive hockey team with no defense), it is not a formula for long term success, as the recent downturns in the market at the time of this writing have shown us.
It’s a Team Sport
There has never been a hockey team that has been successful because of one player. The Edmonton Oilers were dominant in the 80’s with the Great One – Wayne Gretzky, arguably the best player who has every played. But we also remember that Gretzky showed his greatness playing beside a bunch of other great players including Mark Messier, Jari Kurri, Paul Coffey and Grant Fuhr. Very few Canadians have enough experience to put together and manage an effective portfolio throughout their life and into retirement, taking into consideration all the changes that need to happen as one moves through life. There are professionals that study for years and focus on the topics every day who can only specialize in a small area related to investing. So, while you might have learned, with sites like ours, to make good long term investing decisions, don’t forget to get help from financial professionals when you need it. Only then, will you maximize your chances of success.