Four Lessons For Investors From The World Cup

Posted by Simon Moore on June 14
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With the start of the World Cup in Russia, there are some potential lessons that investors can use for how they invest.

The Future Is Hard To Predict

The first similarity between the World Cup and investing, is that we don't know what will happen over the short-term.

Yes, it's probable that the better seeded teams such as Germany, Brazil, Portugal, Argentina, Belgium and Switzerland will progress further in the competition than some of the lower ranked teams such as Morocco, Saudi Arabia and South Korea, but we can't be certain how any individual team will fare.

It's also easier to make predictions at a broad level, such as some of the seeded teams likely making the semi-finals, rather than making a specific prediction of the score for a specific game, like predicting the score of England vs. Tunisia.

Surprises Do Happen

Remember in the 2014 World Cup, that Italy lost to Costa Rica; Spain lost to Chile; and Portugal had a very poor showing in the tournament despite high expectations going in. Also, I doubt anyone predicted Germany trouncing Brazil 7-1. So a few surprising results across a large number of individual matches are typical. 

The same's true of investing, though we can have some confidence that well-constructed portfolios may rise over decades, day-to-day events are unpredictable and individual companies and bonds may perform much better or worse than anticipated.

Defending Matters

Generally, stronger performing World Cup teams benefit from strong defending and goalkeeping, even though the strikers may get more of the attention.

Similarly, in investing it can be tempting to chase this year's hot investing theme, but actually making sure your portfolio has downside protection is just as important for the long-run.

If you can preserve wealth in a bad market environment, then that enables you to continue investing, but a bad loss that makes you move out of the market can be hard to recover from both psychologically and financially.

Who Knows How England Will Do

Of course, we don't know, and won't speculate, how England will do in the World Cup, though we'd love to see them succeed.

However, investing is different, because you don't just have to back a single team for success. With improvements in investing it's now possible to spread your bets globally across all sorts of different companies, assets and industries. This is called diversification. Basically, when you spread your bets in this way, your returns can be quite similar to a more focused approach, but your risk (the up and down swings in your portfolio) can be less severe.

So, enjoy the World Cup, and remember that some of the lessons from it apply to your investments too.

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Written by Simon Moore

He was previously CIO of FutureAdvisor, a US digital advisor. His most recent book Digital Wealth, explains automated investing. He studied economics at Oxford, and completed his MBA at the Kellogg School of Management.

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