Follow your investment playbook

By David Wismer

I seem to say this each year around the beginning of October: It’s hard to believe the NFL football season is already a quarter gone. (Though I have to keep reminding myself that it is 17 games for the first season ever.)

However, it is still a very long way to go until Super Bowl LVI?(56), to be held February 13, 2022, at SoFi Stadium in Inglewood, California.

This season, and this past weekend, have already seen some interesting developments:

• Tom Brady and the Tampa Bay Buccaneers defeated Bill Belichick’s?New England Patriots in Brady’s first return visit as a Buc to Gillette Stadium on October 3. While it was a low-scoring game, Brady nonetheless set the NFL’s career record for passing yards, and thanked “every receiver” who ever caught a pass from him. The Pats had an uncharacteristically negative milestone, losing their third straight home game for the first time since the 1990s.
• In a game against the Detroit Lions on September 26, Baltimore Ravens kicker?Justin Tucker made a game-winning 66-yard field goal as time expired, the longest field goal in NFL history. There was some controversy surrounding the record, as many felt there was a missed delay-of-game call on the Ravens on the play before the kick.
• The Arizona Cardinals, picked by Sports Illustrated to finish last in the NFC West at a 5-12 record, are off to a hot start with a 4-0 record behind quarterback Kyler Murray. Murray is now called out by Sports Illustrated as “clearly the league’s most valuable player.” On the flip side, “can’t miss” #1 draft pick Trevor Lawrence is discovering the realities of the pro game for a quarterback, with the Jacksonville Jaguars starting the season 0-4.

Having the right combination counts

With Flexible Plan Investments located in the Detroit metro area, and many of my colleagues big Lions fans, one of the stories I have been following is the outcome of the trade of quarterback Matthew Stafford to the LA Rams. In addition to the rights to quarterback Jared Goff, the Lions received two first-round draft choices and a third-round selection—so it was probably not a bad deal for their future.

Stafford, and the Rams, in turn, have the chance for a memorable season—sort of a first for Stafford, a quality player whose teams lost more than they won in his 12-year career at Detroit (and who lost the three playoff games he did appear in there). So far so good for Stafford in LA. Despite a tough loss this past weekend to Arizona, they are 3-1 and picked to remain in the Super Bowl hunt.

I can’t help but think of an investment analogy when I consider Stafford’s situation. As has been written in this space more than once, it is not about a singular strategy when considering the structure of an investment portfolio built with a high probability for success. Any individual risk-managed strategy working in combination with other well-constructed strategies is better able to handle a variety of market environments.

Similarly, Stafford is finding success with the right combination of other players, with complementary offensive performers and a strong defense for the Rams. And, of course, credit has to go to the Rams’ coaching staff and front office for putting all of the pieces together.

“Defense wins football games”—and other investment analogies

In interviewing financial advisers for Proactive Advisor Magazine, many of whom are strong advocates of an active, risk-managed approach for their clients’ portfolios, I have heard more than once, “Winning football starts with a strong defense, as does investing.”

One of the authors for our publication took the football analogy a bit further for an article a few years ago called “Agility drills for client investment portfolios.”

I got a big kick out of the article and enjoyed swapping stories with the author, Mike Posey of Theta Research, who played high school football in Texas. Mike likens some aspects of football to several elements of sophisticated active investment management, citing some of the principles he believes are important to financial advisers and their clients, paraphrased here:

1. Diversify. Just as it wouldn’t make much sense to field a team with players that all have the same skill sets or who all play the same position, an agile investment portfolio should also be diversified to include noncorrelated strategies, each with different strengths in the portfolio. Whether you call these strategies active, tactical, or alternative, they are characterized by rules-based approaches that seek to follow market trends rather than being victimized by them.
2. Know the playbook. In an investment portfolio, it’s important for advisers to communicate why each investment strategy is included and what it is intended to do. In football, sometimes an aggressive passing style is called for on offense; at other times, a tightly controlled and conservative game plan is needed. Similarly, it’s equally important to make sure that multiple investment strategies are represented in clients’ allocations and not just multiple asset classes. To be effective, the overall plan for a portfolio should be like a playbook, with different strategies designed to perform during a variety of market conditions across long time frames.
3. Watch the films. Saturday morning after the game is always dedicated to watching the game films. Reviewing the films is akin to advisers monitoring their clients’ portfolios regularly. This is not to say that anyone—client or adviser—should be overly concerned with scrutinizing performance every day or every week. Instead, advisers should review their clients’ portfolios as frequently as quarterly and no less than annually. Such a review can help to determine whether the portfolio’s constituents are performing as expected and whether the risk level is appropriate. (Using Flexible Plan Investments’ business analyzer tool, exclusive to FPI, advisers—and, through them, their clients—can view the suitability, durability, diversification, and multiple benchmarks customized for each client’s actual portfolio. It is especially helpful for monthly, quarterly, or annual reviews of an adviser’s entire book of business. Advisers can access the tool on the adviser dashboard of flexibleplan.com after login.)
4. Keep fantasy football in its place. A final point in this analogy is to be wary of the investment equivalent of fantasy football. Backtesting can be a valid and productive analytical tool when used properly, and a dangerous tool when used improperly. Investment advisers must resume their coaching role and make sure that not only are trading strategies evaluated properly but also the methodology of producing backtests.

Mike summarized,

“Failure to include agile investment strategies can be costly. In football, the lack of agility can result in an opposing team’s score, or your own team’s fumble or tackle for a loss. For an investment portfolio, the lack of ability to adapt to market conditions can result in huge losses. …

“After 30-plus years in the investment industry, and having lived through markets of all types, I have come to some firm convictions. By including actively managed strategies in your clients’ portfolios, they will have a better chance, I believe, of being on the winning team and reaching their investment goals.”

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If you are a fan, I hope you enjoy the rest of the football season, whether you root for a high school, college, or professional team.

And despite the stock market’s current volatility, let’s pull for the “Super Bowl Indicator” to break a recent losing streak. The victory of the Tampa Bay Bucs earlier this year calls for an overall up market year, according to the indicator—a tongue-in-cheek prognostication that nonetheless has had a success rate of 74% for over 50 years!