The 2020 Stanley Cup playoffs lasted throughout August and September, bringing hockey fans a shortened season full of upsets, underdogs and blowouts. Like investing, putting together and coaching a winning hockey team involves balancing risk, reward and expectations and ultimately requires a bit of luck along the way. Here are a few lessons from teams in the National Hockey League and others that we can apply to the world of investing.
Lesson #1: Forget Perfection, Position Yourself Strategically
It requires hard work, practice and a strong team; however, the odds of winning the Stanley Cup are fairly low - so are the odds of consistently selecting prime investments within the market. This can make the process of approaching the playoffs and investing - daunting.
Successful investing stems from focusing on what you can control. That can mean building a portfolio that is positioned to maintain return premiums, such as size, value or profitability that can improve risk-adjusted returns. Additional areas that are also within your control include asset allocation, keeping investment costs low, minimizing taxes and more.
Lesson #2: Don’t Let Past Performance Dictate Future Decisions
Similar to allowing a past team’s success to influence how you feel about the future of your team, investing based on previous performances will generally only lead to disappointment. As an investor, you should never assume that your “best pick” in the past or even from the most recent year will act similarly in the near future.
It’s also important to keep in mind that luck can often play a role in the success of one’s season. While your coaches and players might be skilled, sometimes a little luck can go a long way when paired with skill. It’s relatively common to see funds that have outperformed in a certain amount of time proceed to underperform in the following period.
Lesson #3: The More You Watch, The More Drama You Can Expect
Just like watching a clock tick slowly as you wait for a profound moment or event to take place, the more you watch the Stanley Cup, the more attached and emotional you often become about the outcomes. While highly entertaining, the drama associated with the Stanley Cup is undeniable.
Keeping a close eye on the market is almost never helpful or entertaining. In fact, the more you watch the markets, the more susceptible you may become to making poor investment decisions. Great investors detach themselves as much as possible from regular stock fluctuations.
Lesson #4: Leave Emotions Out of the Decision-Making Process
As humans, we see patterns in everyday life and our tendency to maintain memories of the times they “work” only enhances that pattern-seeking behaviour.1 A great example is deciding to cheer on the team you grew up rooting for rather than the team that evidence and probability suggests is most likely to win it all.
When it comes to making investment decisions, it’s wise to emphasize evidence-based investment theory and research as opposed to basing your judgments on minor indicators, patterns or gut feelings. Quality decision-making processes should ultimately protect us from our internal hardwiring that causes us to ignore, or at the very least, misinterpret probabilities, discover patterns where none exist and exhibit emotional responses.
Lesson #5: Keep in Mind the Importance of a Great Coach
There’s no denying that a team’s coach contributes significantly to its success or failures, sports-related or otherwise. Coaches can act as key motivators and can also be calming in times when emotions run high. Working with a trusted, educated financial professional can be beneficial in terms of financial well-being. Having a good behavioural coach is crucial to maintaining emotional stability and clarity as you make financial decisions.
Financial advisors often act as emotional barriers between individuals chasing returns and running from emotionally charged markets. Without proper guidance, you may lack the understanding and discipline to approach investments wisely. While we can certainly compare the two, creating a winning team to take home the Stanley Cup doesn’t have the same high stakes as developing an investment portfolio. Be sure to get in touch with a trustworthy advisor before jumping into the season.
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