Defense wins championships

As the football season winds down, some fans already have set their sights on next season because the team they root for was eliminated from the playoffs (myself included — long suffering N.Y. Jets fan!). Those fans with a team in the race for the championship are still fortunate enough to hold on to the dreams they had at the beginning of the season.

Football teams, like investors, all start out their journeys with the best intentions. Coaching staffs and players enter the season with the goal of making the most of their resources to put the highest number of wins possible up on the board. Some of those wins probably are the result of luck, but the majority surely are the result of good preparation and adapting to circumstances they can’t control such as weather, injuries and their schedule.

Economists tell us that corporations and individuals should allocate their assets to the highest possible use. Investors also should allocate their financial assets in the most efficient manner possible in order to create a portfolio that is consistent with their own need for liquidity, risk tolerance and investment time horizon. This would be based on an unemotional process that is definable and repeatable — not based on a whim. The result would be a well-diversified portfolio structured in a manner to help minimize downside risk. Just like a football team with a defense that bends but doesn’t break — your portfolio should stand the test of time through the course of your investing “season.”

Defense — like insurance — can be something you don’t realize you need until it’s too late. Because the stock market historically has gone up about 75 percent of the time, investors can be lulled into a state of complacency that undermines their ability to recognize and manage risk. That’s when the market seemingly does what it does best — it fools investors just when they think they have it all figured out. Coming out of a tremendous 2017 for investors, markets experienced a blow-off to the upside in January 2018. And who wasn’t beaming like a new grandparent when they saw their statements after that January? Then the fourth quarter of 2018 humbled all of us. Markets globally were down 15 percent to 20 percent in fewer than three months, reminding all of us that our returns aren’t linear and that there is no free lunch. For those of us that were not entirely convinced early during this downturn, the Standard and Poor’s index of 500 stocks decline of more than 7 percent in one week in early December certainly was an abrupt reminder that the market does what the market wants to do.

Don’t become statistically eliminated from reaching your financial goals because you don’t have a well-thought plan in place that will guide you through the tough times. Relying on what you’re familiar with or an investment that you believe has always worked — such as owning too much of your own company’s stock — can sidetrack your retirement plans. Knowing your opponents — such as health care costs (including long-term care), market volatility, and underestimation of your life expectancy, inflation risk and poor planning — will allow you to craft a well-thought game plan. This in turn will put you in a position to have your best defense on the field to protect the lead you already have on the board.