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How football can help you think about investing
Following his recent video at Arsenal's Emirates stadium, Gavin Lumsden visits Chelsea FC to talk about asset allocation!
by Gavin Lumsden on Nov 16, 2012 at 11:02
What has football got to do with investing?
The crazy economics of the sport certainly don't provide a good example for anyone saving for their future. However, the classic 4-3-3 team formation does offer a useful way of thinking about how to spread your money around when investing in an ISA or pension.
In other words, it can help us think about asset allocation.
For this video I popped down to Chelsea's Stamford Bridge.
My first football and finance video was shot at Arsenal when I answered the question, 'What does a fund manager actually do?'
Both videos are part of The Lolly Investor Programme, a weekly investment guide for anyone new to investing.
Hello and welcome to the Lolly Investor Programme.
This week I'm returning to my idea of using football to explain some of the basics of investing in an ISA or pension.
You may remember a short while ago I went to Arsenal’s ground at the Emirates to talk about what the fund managers who look after our ISA and pension savings actually do.
This time I want to invite you to play fantasy fund manager with me as I talk about asset allocation, which is the term used to describe spreading your money sensibly around a range of investments.
To do this I've come to Chelsea's stadium at Stamford Bridge, which as an Arsenal fan has got to be one of the last places I want to be! Still, it’s good to be objective and besides it’s worth marking the fact that Chelsea have just made their first profit in nine years under the ownership of Roman Abramovich, the Russian billionaire.
Well done Chelsea! Let's see how you get on now you have to live within your means under the financial fair play rules. But I’m not here to talk about Chelsea’s finances. I’m here to talk about how you can make money.
So let’s have a go at thinking about asset allocation in terms of a football squad.
Earlier in this series I introduced you to the three main asset classes: shares, bonds and property. There are also commodities such as gold, copper, oil and basic food stuffs which form an asset class of their own.
Cash is also an asset class. It won’t grow as fast as other assets but provides a useful safe haven when stock markets are rocky. So what can we make of these five asset classes in footballing terms?
Let’s take the classic 4-3-3 football formation. That’s four defenders in front of the goal keeper, followed by three mid-fielders and three forwards.
My Chelsea contacts tell me this isn’t the line-up they use. They prefer a more fluid 2-4-3-1 formation in front of the keeper.
Never mind that, let’s see what we can make of the 4-3-3 formation in investment terms. Let’s say the goal keeper is cash: a safe pair of hands who won’t lose you money but isn’t going to score many goals.
The four defenders could all be bonds. Bonds, which are tradable loans issued by governments and companies, pay a fixed level of income and are generally regarded as safer than shares.
That’s a dangerous generalisation. In fact you can lose as much money in bonds as you can in shares. Nevertheless, combining the defensive qualities of bonds with the growth potential in shares is a good idea.
Moving on we could allocate our mid-field positions to property, gold and other commodities.
That would leave our forwards to represent our positions in shares.
It’s the shares that are going to score a lot of our goals and provide the growth we need to build up a decent pension pot. Of course shares can be volatile and like the best strikers go through long, lean periods where they don’t score goals.
But with this back up in bonds, property and commodities, those periods shouldn’t be too bad.
Who knows, perhaps some of our assets in the mid-field and back row will break through and score a few goals?
Remember the point of asset allocation is to minimise the amount of money you can lose at any one time. For example, when share prices are falling it is quite possible that bonds will rise.
But don’t take this analogy too literally. The right asset allocation for you will depend on your attitude to risk and how long you have got to save before retirement.
If you’re younger you may want to devote more of your players to shares. Or you may not be interested in investing in commodities.
That’s not a problem. The point is that it is useful to think about your money being positioned in different ways, just like a football manager would move his players around. You can use this idea whether you are a beginner investor or an old hand.
If you’re just starting out there are plenty of global and multi-asset funds that will invest your money in this way. If you’ve already saved a decent amount you can use the football squad analogy to invest in a fund for each position.
For example, you could split your forward share positions into a fund investing in UK shares, another in emerging market shares and a third in European or American shares. That’s all for now.
I like this football theme though, I think I will come back to it next time. Until then goodbye.
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by Gavin Lumsden on Apr 16, 2014 at 15:17