Rugby and investing both require players with different capabilities

The Springboks won the Rugby World Cup in 2019, which included some spectacular individual performances from various players, including Cheslin Kolbe. Have you ever wondered what would happen if a team consisted of players that all have the same height, speed and ability as Cheslin Kolbe? The short answer is that the team would not do very well.

Rugby teams consist of 15 players and all of them are built differently, and each become more relevant at different stages during the game. When the forwards need to scrum, the wings won’t be doing anything and when a kick is being chased down the touchline the props will most probably be doing nothing while the backline are coming into play.

In a time when every second headline talks about the newest millionaire and the successes of so many people who seem to have barely lifted a finger, it starts to feel that an investment strategy should consist of 15 Cheslin Kolbe’s. Everybody in the team (portfolio) should be a match winner, no place for a mistake or something to show value at a later point in time. The message that wealth needs to be created immediately because the opportunities are endless and taxi drivers are still retiring as millionaires in New York, misses a fundamental value of portfolio construction: diversification.

The old saying goes that diversification is the only free lunch when it comes to investing, and this is still true. However, it is not automatic – it needs to be actively employed as a strategy. In rugby, a coach can select fifteen different players with complimentary abilities and skills. In investing, you can use various different asset classes or shares and don’t have to risk everything on timing the market by only selecting one option.

Investing in a portfolio of assets can also be seen as a ‘team sport’ where it does not matter so much which player scored the try, but rather that the team has fared well at the end of the day. The players (funds/stocks) that had a poor game can be kept on watch for a while, but the reasoning behind their original selection for the team is kept in mind. The individual’s form will at some point pick up again and prove his worth, but if the decline proves permanent it may then be necessary to consider a replacement.

Diversification is used to ensure that the team wins while the different players go through different cycles of performance. Performance of different asset classes are also cyclical and there will always be periods of underperformance as well as periods where alpha (performance above that of the benchmark) is generated.

Investing is about reaching financial goals and diversification helps investors reach those goals. Diversification is commonly thought of as allocating funds to different asset classes such as property, cash and equity, but it also applies within an asset class. For example, when investing in shares, you would aim to hold a basket of shares in different companies, rather than just holding the shares of one company. Furthermore , a portfolio of equities can be made up of local and foreign stocks, developed and emerging markets and a spread between resources, industrial and financial stocks, to name a few. Diversification is, and should be, present in every aspect of a portfolio.

Everybody wants to be the hero like Cheslin Kolbe by displaying fantastic individual ability, but in the end the goal of the investment is what really matters and various players with different capabilities are needed to consistently reach your goal.