It’s NBA Finals time again and for those that don’t know, I do very much love my basketball. With the Warriors ‘super-team’ making it to the finals again (yawn), it got me thinking about how these so called super teams assemble and how combined talent can work together. When it works at its best, the whole is most definitely better than the sum of its parts. For those that are not that into the NBA try and humour me whilst I attempt to draw some parallels between two of my passions being basketball and personal finance.
So what is a super-team anyway?
Most people draw back to 8 July 2010 which was the day LeBron announced ‘the decision’ as the day that the NBA as we know it changed forever. The decision spawned the Miami Heat “big 3” super-team of LeBron James, Dwyane Wade and Chris Bosh and some role players to fill out the squad. For better or for worse this super-team phenomenon is now in full force and forever lifted the bar for ultimate success. It is no longer enough to have a good duo as you need a full diversified top class ensemble to compete deep into the playoffs.
This has led to arguably one of the greatest teams of all time with the Golden State Warriors lining up for their 5th NBA Finals appearances in as many years. Now this team is stacked with genuine all-stars in every position. Even the great Lebron James couldn’t overcome the Golden State Warriors last year with one other star and was ultimately swept 4-0. Much in the same way that having a quality investment portfolio requires more than one good investment to ensure long term success. Not having enough diversification increases your concentration risk and can be a case of all or nothing. Relying on too few different investments means your fortunes are tied to a very limited number of assets and outcomes.
The definition of a super-team is open for debate, but for brevity we will assume it is where you have at least 3 stars in your team. Sounds tough already, but really 2 of these need to be superstar level in the Golden State Warriors era where they have a full starting five of All-Stars! The definitions are subjective, but that’s half the fun. It is an arms race to stack as much talent into your starting five as you can to have any chance of winning a Championship.
It makes sense in much the same way as it does with investing, as the benefit of having a diversified multi-pronged investment strategy is that one of your stars can have a poor performance and the other teammates step in to pick up the slack. Having the right mix of uncorrelated assets smooths your performance at a high level and ensuring the difference between good and bad investment years is reduced (see the below chart for a year by year look at how various asset classes performed since 2003). Last year’s best performer is no guarantee to repeat the dose so spread your investments!
Imagine a portfolio of investments which was so good that it was talked about as a dynasty, now that is something to strive for. It is hard to achieve and takes patience, investment of time/money, an eye for talent, good management and a touch of luck… but the end result is nothing short of amazing.
In summary, when diversification in portfolio construction is done correctly (super-team style) it is a thing of beauty as it delivers a diversified source of return with less volatility. You get a smoother ride through the market cycles as you have the benefit of lower correlation to equities, which traditionally is majority of investors’ portfolios. The exciting part is that it has never been easier and affordable to get exposure to these strategies and in many cases can be accessed via your share trading account. The challenge is no longer finding options, but rather filtering through the multitude available to work out which is the right fit for you. Time to play general manager and fill your portfolio roster with the right investments!
Personal basketball opinions
Wealth Collective trading as Pekada (ABN 95 624 612 684), corporate authorised representative (CAR), number 1263725, is authorised to provide financial services on behalf of Communitas Wealth Pty Ltd.
The information provided on this website is general in nature and does not constitute advice. You need to consider with your financial situation and your particular needs prior to making any strategy or products decision. Pekada will endeavour to update the website as needed. However, information can change without notice and Pekada does not guarantee the accuracy of information on the website, including information provided by third parties, at any particular time Unless otherwise specified, copyright or information provided on this website is owned by Communitas. You may not alter or modify this information in any way, including the removal of this copyright notice.