You might think I’ve gone absolutely nuts trying to compare our national sport with the serious business of investing, and you may be right. But over the years I’ve come to notice a number of similarities where building a winning portfolio could be very much akin to building a successful football team. So here are my top three tips for building a winning portfolio (and football team).
Think long term and be patient
Ever heard the saying ‘Rome wasn’t built in a day’? People often forget that Sir Alex Ferguson, one of the most successful football managers of all time, took four long seasons to win his first trophy. Of course,he went on to win many Premier League titles and countless trophies, but it certainly didn’t happen overnight.
Building a winning portfolio can also take many years of patience and perseverance. Would Sir Alex have had such an illustrious managerial career in this modern age of short-termism? I very much doubt it.
Warren Buffett, hailed by many as the greatest investor of all time, didn’t make his first million until 1962 (aged 31), even though he had been investing since the age of 11. It would be another 28 years before he joined the ranks of the billionaires, and a further 18 years before he became the richest person in the world, in 2008. When it comes to investing, patience is definitely a virtue, and a profitable one at that.
A balanced portfolio
We all know that Sir Alex went on to build many successful Manchester United (NYSE: MANU) teams based around a core of young players. But most people forget that the likes of David Beckham and Ryan Giggs were also supported by more mature and experienced players, including my favourite player of all time, Eric Cantona. Here youthful exuberance was perfectly balanced by the more grounded and experienced Frenchman.
By the same token it would be foolish to build a portfolio solely comprising fledgling companies yet to prove their business model or profitability. I’ve always believed that a good mix of mature and stable blue-chips, along with a sprinkling of more exciting and speculative small-caps provides the best of both worlds. Remember, taking on too much risk can be hazardous to your wealth, and capital preservation is more important than making profits.
That brings me nicely on to my last point, diversification. How many football teams can you name that comprise solely 11 strikers, 11 defenders, or even 11 goalkeepers? A solid portfolio needs a good mix of stable, less volatile defensive companies that won’t buckle in times of crisis, as well as perhaps more cyclical companies that perform well during boom times.
Defensive sectors like utilities and consumer goods consistently perform well during the bad times as well as the good, while more cyclical sectors such as housebuilders and retailers ebb and flow in tune with the economic cycle.
Finally, in the interest of fairness, I’d like to point out that other football teams are available to support – although they may not be as good!
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Bilaal Mohamed has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.