With Robert Stammers, Director of Investor Engagement at the CFA Institute, Contributor for Huffington Post
Steve spoke with Bob Stammers, Director of Investor Engagement for the CFA Institute, to get a unique perspective on investing strategy. He noted that Bob has authored over 100 articles for Forbes, Investopedia, and other media outlets, and he’s also been a senior equity analyst and a portfolio manager.
Approaching Investing Like Football
Bob likens managing your investments to managing an NFL team and believes one can learn a lot from football strategy that can be applied to managing your money. Steve made the observation that many investors seem to approach the market with not much of any strategy. “When it comes to our own personal finances, we sometimes play as if life’s just a free for all with no rules or strategies. But like football, winning investing is about planning, hard work, and thinking about the future.”
Bob agreed with Steve, reiterating the need to have a clear investing strategy. “Investors need to have a plan. And they really need to understand what their goals are because that drives their investment strategy. It drives what assets they’re going to buy for the objective of achieving their unique financial goals. Like football teams that spend a significant amount of time in pre-season determining their overall team strategy, investors must also determine their overall investment objectives, including which strategies they will employ and which assets they should purchase.”
Running And Passing Strategy
Bob elaborated on his football analogy by saying, just like a football team, an investment portfolio needs to employ a variety of strategies. On an NFL team, players are picked to play a specific position on the field. In investment management, each asset serves a specific role in achieving an investor’s long-term financial objectives. Bob pointed out that asset allocation across equities, bonds, and alternative assets has proven to have the greatest impact on a portfolio’s investment performance.
A large allocation to equities is an offensive strategy that can be compared to the passing game. Like the passing game in football, there’s the opportunity for larger gains, but there’s also greater risk. Equities are riskier in relation to most other assets and can cause investment losses and portfolio values to swing unpredictably.
Bob compares investing in bonds to the ground game, saying, “The returns on bonds are much more consistent, but you don’t expect as much of a return.” So, like the running game, bonds provide portfolio stability and, although performance is often less than that of equities, it is much more consistent.
Defensive Investing Strategy
Steve asked Bob about the defensive side of investing strategy, to which Bob’s answer was diversification. He recommends that investors diversify not just across different assets but within each asset class as well. “Within bonds, there are corporate bonds and municipal bonds and government bonds. And in equities, there’s small-cap stocks, large-cap stocks, and blue chips. And then there’s international stocks. By investing a bit into all of these, what you’re hoping is that when one asset is doing poorly, that other assets are doing well.”
The Importance Of Coaching
Staying with his analogy to football, Bob also stressed the importance of having a good coach. He advised listeners, “Investors need a good coach, too. And this is why we say that investors can get a lot of value out of professional investment advisors. They can help them with their portfolio, constructing their portfolio, figuring out what assets should go in it, and more importantly when it needs to be tweaked.”
You can learn more about investing by checking out some of Bob’s articles at the CFA Institute.
Disclosure: The opinions expressed are those of the interviewee and not necessarily of the radio show. Interviewee is not a representative of the radio show. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances. The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by the radio show.
Watching football is an American obsession, especially with the Super Bowl coming up in February, but even if it’s not your cup of tea, most of us know how the game is played and that strategy is the key to success. However, when it comes to our own personal finances, we play as if life’s just a free for all with no rules or strategies. But like football, winning is about planning, hard work, and thinking about the future.
So with that in mind, I invited my next guest. His name is Bob Stammers. He’s Director of Investor Education at the CFA Institute. Bob has authored over 100 articles for Forbes and Investopedia and others, and he’s also been a senior equity analyst and a portfolio manager.
Hi, Bob. First time on the show. I’m so happy to have you on. Welcome.
Bob Stammers: Yeah, thank you very much. Thanks for inviting me.
Steve Pomeranz: So I really liked your article in the Huffington Post comparing football to your finances. So let’s get started. You started in the article talking about preparation, or in the case of football, the preseason. Tell us about that.
Bob Stammers: Yeah. Well, you see the NFL teams spend an incredible amount of time in the preseason driving strategy. They are actually building a plan. They’re figuring out which players are going to be on the field, which ones work together as the team, what’s their often passive and defensive strategies. And these are all done for one purpose, and that’s to achieve their one goal, which is to win a championship. Well, it’s very, very similar for investors. Investors need to have a plan. And they really need to understand what their goals are because it drives everything.
First of all, it drives the plan, their investment strategy. It drives what assets they’re going to buy, and once again, all for the objective of achieving their unique financial goals.
Steve Pomeranz: Well, we’ve heard those kinds of words before about diversification and asset allocation, investment objectives, but you even break it down further, which I thought was really terrific. So you talked about, with regards to football, you have an offensive line. So you mentioned there are offensive type strategies in your investments. What are some offensive strategies?
Bob Stammers: Well, first of all, I want to say the thing that drives performance in an investment portfolio is where you put your money. So it’s the allocation into either equities, which people know are the drivers of performance or in bonds. So where are you put your money really drives performance.
So it’s the same for a football strategy. There’s football teams that like the passing game. They use a lot of the passing game because the passing game drives yardage. You get extra yardage, but with that yardage comes some risk. There’s the risk of interception or the quarterback being sacked. So there’s extra risk, but there’s greater return.
Now, the other place that investors can put their money in is bonds, and that’s very much like the running game. The running game is much more consistent, but the yardage expectation is much lower. Bonds are the same way. The returns on bonds are much more consistent, but you don’t expect as much of a return. So depending on what a football team does, whether they’re much more aggressive in the passing game, they’re taking more risk, or whether they’re more of a running game and they’re taking less risk. And that’s very similar to what you would do in your own investment portfolio.
Steve Pomeranz: And every strategy on the field has to have a solid offense and a solid defense. And you have to practice both, and you have to know when to pass and what the risks are, and when to run, and what the expected gains are. And really having a strategy on the field that’s just all passing is not going to necessarily be that effective. And also to have a strategy of all running is not going to be that successful.
I was thinking about your idea of the running game. You don’t expect a lot of yardage, and that’s very much like owning bonds in your portfolio. So there’s less risk. In bonds, there’s less risk. But, of course, there is another kind of risk in the game of football. It’s the risk that you’re not going to win if you’re on the ground the whole time. And in investing, it’s the risk that you won’t keep pace with inflation. Any thoughts on that?
Bob Stammers: Well, it’s true. Inflation is one of those risks that everyone has to worry about. And that’s why you need to really be looking at what your assets are going to provide in terms of return because what you’re really looking for is what’s called the real return or your return after inflation because that’s really the money that you have left over to spend. And so you really need to be looking at whether the assets that you have together, the team that you’ve put together, the portfolio, is going to have a return that’s going to at least to keep up with inflation and provide you some real growth over the time period.
But people need to be careful, though, too because you need to make sure that whatever portfolio that you create, that it’s within your risk profile, that you understand the risks that you’re taking, when certainly it makes sense because you need to understand your risk profile in what you’re investing in. Will it still provide you with enough return to achieve your objectives?
Steve Pomeranz: We’ve been talking about the offensive strategy. And there’s risky offensive strategy, more risky throwing and so on, which is equities. And we’ve got the ground game and so on, but there’s also defense. You have to play good defense in order to win. What is the easiest way or the best way that an investor can play defense in their portfolio?
Bob Stammers: Well, you mentioned this earlier when you were talking about diversification. And diversification is really the way that you play defense in your portfolio. It’s very similar to the way that football teams do their defense. They have different players on the field that do different things depending on the offensive strategy. You have the quarterbacks and the safeties that are basically in the secondary to defend against the passing game. You have the linemen and the linebackers that defend against the running game. Each of them has a unique role on the team, and they defend against whatever, in this case, from an investment point, whatever market scenarios there are.
By investing in different assets, different types of assets, within bonds, there are corporate bonds and municipal bonds and government bonds. And in equities, there’s small-cap stocks, which are small companies, large-cap stocks and blue chips. And then there’s international stocks. By investing a bit into all of these, what you’re hoping is that when one asset is doing poorly because of what’s happening in the market, that other assets are doing well. And as long as these assets are not correlated to each other, meaning their performance doesn’t move in lockstep with the others, then there’s a good probability that you’ll get a decent return out of your portfolio regardless of what’s happening in the marketplace.
Steve Pomeranz: Very, very well said. My guest is Bob Stammers, Director of Investor Education at the CFA Institute.
Now, in football, we also have special teams. And in investing, how would we relate special teams to investing?
Bob Stammers: Well, most people, most portfolios, most investors are going to put most of their money into bonds and equities. That’s what most people do because that’s where most of the assets are. That’s a very good portfolio to be made.
But some people invest in other types of assets, and this is what I call the special teams. They might be real estate or commodities, or even actively managed hedge funds. And that’s going to be either to increase return or to increase defense by increasing diversification. And it’s very similar to the special teams of football because they’re specialized. And if you see, they are there to either increase the return on a punt or a kick return or there to defend against those same, either a punt or a kick return, or comparison that I made was going for two instead of the extra point. Going for two gives you that extra return, it’s more risky than the extra point. And that’s what really special teams are for.
Steve Pomeranz: Right. I think when you’re talking about real estate and commodities and hedge funds, you really need to be very careful who you pick to put on those special teams. That’s for sure.
Bob Stammers: Absolutely, especially if you’re going to do something like hedge funds because hedge funds can actually be riskier than equities, although once again, the return potential is much higher, but the risk is much higher, too.
Steve Pomeranz: Now, do you think that any football team could operate without a coach?
Bob Stammers: No. And then, coaching is really, really important because they figure out the strategies as well as figure out who are the people that are going to actually play on the field, and if they play well together. And the investors need a good coach, too. And this is why we say that investors can get a lot of value out of professional investment advisors. And that way, they can help them with their portfolio, constructing their portfolio, figuring out what assets should go in it, and more importantly, when it needs to be tweaked, if it’s not working correctly, if there’s something that’s not doing or playing the role that it’s supposed to,
Steve Pomeranz: I guess the preseason would be all the planning. And then, the offense would be the equities deciding the mix, deciding what kind of bonds should be in the portfolio, which is the ground game, defining how to asset allocate the money so you have a proper defense, and if you’re going to put special teams in, hopefully being able to pick out the best players in order to get that extra rate of return, or even so, deciding, no, we don’t want special teams on our portfolio’s playing field.
Bob Stammers: Very well said.
Steve Pomeranz: Okay.
Bob Stammers: … exactly how it is.
Steve Pomeranz: Thank you very much.
Bob Stammers: Most importantly, I think, is the fact that your portfolio needs to work as a team. So you need to really have a plan that helps to determine what that team looks like, what’s in it, and whether it would work well together to fulfill your investment objectives.
Steve Pomeranz: My guest is Bob Stammers, Director of Investor Education at the CFA Institute. Thanks, Bob. It’s been terrific.
Bob Stammers: Thank you very much.