Sports are a big part of the culture at 361 Capital, such a part that, in my free time, I coach a competitive youth soccer team. As spring soccer season draws near, I am gearing up for rain-soaked practices and at least seven rescheduled games due to late snow storms here in Colorado. In preparation for the upcoming season, my soccer team participated in a pre-season tournament in Las Vegas this past weekend.
As I reflected on the event, I came to recognize the parallels between soccer (or any sport) and managing a portfolio.
1) Preparation is Key
My team is known for being physically fit. Each player must pass a timed mile test and run countless (or so the girls say) sprints each practice. They spend a good portion of practice simply working on individual foot skills with the ball and juggling with their feet. Though these things may seem rudimentary for a competitive travel team, they are standards each player must meet. Those seemingly basic parts of the game are what led to success for the team this past weekend.
When building portfolios, it’s important to ensure every one of your investments is of the quality, and exhibits the characteristics, required to play its role in the portfolio. Each component must be thoroughly vetted to ensure that at game time, it’s ready to play. Putting in the proper due diligence on the front end to fully understand the philosophy, construction and risk profile of your investments can be a game changer for the overall success of your portfolio.
2) Don’t Just Focus on the Short Game
Tournaments are typically weekends filled with upwards of five games. With the end goal of winning the tournament, a lot can happen over those 350+ minutes. This past weekend was not unlike most tournaments I’ve coached. In our second game, we ended up losing a heartbreaking 1-0 game. Despite the loss, we stayed focused on the end goal and controlled what we could. If we dwelled on the one loss, we would have never rallied to make it to the finals.
Focusing on your clients’ long-term goals is just as critical. It’s important to evaluate performance of a specific investment based on a full market cycle, not just over a few-day period. If you have prepared properly, and conducted thorough due diligence to fully understand how and when your investments should perform, you are setting your clients up to reach their goals.
3) Diversification Creates Winners
My team ended up winning the tournament. As a coach, what was most impressive to watch, besides seeing that our preparation and focus on the long-term goal had paid off, was how the team worked as a unit. A player would struggle one game, but then stand out the next—each player had their shining moment and carried one another when they needed it most. Defense stepped up big to stop some close goals, the midfield set up the scoring opportunities, and the offense buried balls to the back of the net. It was a 100% team effort win.
As you build portfolios, think like a coach. Ensuring proper diversification in portfolios is crucial. For many, this means adopting a diversification strategy that goes beyond the standard 60/40 portfolio. The “offense”, or equity side of investors’ portfolios, has done most of the heavy lifting in recent years. However, as market uncertainty continues, the “defense” side of a portfolio has begun to play a bigger role.
Alternatives can provide two main benefits to client portfolios. With little-to-no correlation to traditional markets, certain alternatives can offer investors “true” diversification. Additionally, other alternatives seek to reduce risk without sacrificing return potential. Understanding how all of the parts of your portfolio work together, in various market environments, is vital.
Though portfolio construction is much more complex than a youth soccer tournament, it provides a valuable reminder of the building blocks—preparation, focusing on the long-term and diversification—that are important to success.
Read our latest blog post, Four Things to Consider When Choosing a Long/Short Equity Fund >