What Can Football Teach You About Investing?
By Stuart and Sharon Crickmer
Ninthwave LLC
Whether they turn pro or not, one thing college football players have in common is they will all need to make decisions about investments that will largely define their ability to be financially secure in retirement. And, they need to understand this by the time they are in their twenties.
The problem is investing can be confusing or boring…or both.
Let’s ditch the way investing is typically discussed and instead describe it through something far more interesting—football!
The 200 Yard Game
Imagine a modified NFL football game where your team is always on offence and you call the plays. Your score depends on total yards for your offense. A turnover counts as -10 yards. To win the game, you need to gain a net of 200 yards. You get 40 plays to do it.
It’s time to get out the playbook. You need to average 5 yards per play. Since the NFL average in 2012 was 5.4 yards per play, this seems doable.
How do you mix your play calls? Running the ball might generate more positive plays and fewer turnovers but also fewer yards (NFL average 4.2 yards per rush in 2012). Passing the ball has the potential for more yards (NFL average 6.7 yards per pass attempt in 2012), yet does expose you to the risk of sacks and interceptions.
Managing the Game
Regardless of your initial game plan, as the game progresses you will likely need to adjust your strategy. What if after 20 plays you have only gained 80 yards? You might be forced to pass more. On the other hand, what if after 30 plays you’ve already exceeded 200 yards? Now you just need to protect against turnovers and negative plays. Conservative runs with both hands on the ball make sense.
Play Calling With Investments
Investing is a bit like this. Your goal, instead of 200 yards, is some amount of money you need in the future (enough to allow you to retire, for example). Instead of mixing runs and passes, you mix different types of investments. You can invest in stocks (ownership of a company) or bonds (loaning money). You can earn income (dividends or interest) on these and their prices can go up or down in the markets. Short-term investments are another option (you earn smaller amounts of interest and the price is stable).
From a football perspective, stocks are like passes. They have the highest potential but you have to live with more negative plays (stocks will have periods where they lose money). Bonds are like running the ball. They make money most of the time but generally not as much as stocks. Short-term investments (e.g., money market funds) are similar to a quarterback sneak. They are safe but, as “short yardage” investments, lack the long-term potential of stocks and bonds.
Investment Game Plan
The investment equivalent of a game plan is your asset allocation—simply how you mix up your investments. In general, the farther you are away from your goal, in terms of time and money, the higher percentage you would allocate to stocks. As you get closer to (or exceed) your goal, your play calling gets more conservative and you begin to favor bonds and/or short-term investments over stocks.
While there is more to it than this, matching your asset allocation to your goal (your game plan to game situation) is a big part of successful investing. Another—and perhaps the biggest—factor in investing is how long you invest (how many plays you get to run).
The 20 Play Game
Let’s go back to the original 200 Yard Game and change the rules a bit. Instead of getting 40 plays to gain 200 yards you only get 20. You now need to average 10 yards per play. What do you do? Instead of reaching your goal with average success running and passing you need well above average yardage to get there.
This is the dilemma many people face if they wait to start investing for retirement. If you invest for 40 years you can more easily reach your retirement goals with average market returns. If you wait to start investing, reaching your goals becomes harder and harder and, if you wait too long, becomes unattainable. You’re in Hail Mary mode.
To get 40 years—40 plays—you need to start investing for your retirement when you’re in your twenties. Fortunately, most companies (including NFL teams) make this easy through employer-offered retirement plans, including 401(k) plans.
You just need to be ready to take advantage of it—or you’ll later wish you had those extra plays.