Financial Planning Analogy
Does anyone out there remember the agonizing analogy section when you took the SAT test? There were words on that exam I had never even hear of. I'll stick to the math questions. At any rate, I decided to have a little fun and created an SAT-like question below. Let's see if you pass the test...
Slumber : Sleep :: Football : _________
B) Jacksonville Jaguars
C) Financial Planning
Clearly, the answer is C. Actually, you are probably thinking to yourself, "Excuse me, what? Come again. Are you drunk?" All of you fantasy football geeks stick with me on this one. While others who don't follow the game as closely -- like my wife who once asked me why our team gave the ball to the other team, by kicking it, and didn't go for it on 5th down -- there's a chance this analogy might be over your head. Although if you have any basic knowledge of football the general comparisons will mostly make sense. Perhaps some of it is a stretch, but the point should hit home nevertheless.
Using Football to Explain How Financial Planning Works
A successful football team like a successful financial plan requires a high level of synergy across the board from several different components. In football, a significant amount of coordination from all levels of the organization helps drive the collective group towards working to achieve their end goal -- championships. The types of roles within the organization include the GM, the coach, assistant coaches, 22 starting players (11 on offense and 11 on defense), backups, special teams, and to some degree, the fans. In order to be successful, the sum of the parts must be hitting on all cylinders. Any weak links will get exposed by your opponent and make your team pay for it.
These same principles apply to financial planning. A gap in your plan will delay your retirement goals. Worse yet, you might find yourself not having enough funds to send your child to college without your son or daughter being buried by massive amounts of student debt.
Note how the New England Patriots are the quintessential example of how to mold all the various pieces together into something that is cohesively excellent. Whereas, in financial planning, a fee-only fiduciary is often considered the gold standard because that type of planner must disclose all conflicts of interest, put your interests ahead of their own, and work in concert with your other trusted advisors to ensure you are maximizing every resource possible.
If we can agree that the sum of the parts is an essential component in both football and financial planning, the best way to draw a closer comparison between the two is to break it down by personnel and position groupings.
Equivalent to the financial planner
Do you want to be like the Cleveland Browns or the New England Patriots? In most instances, Super Bowls aren't won without an excellent quarterback behind center. Recent exceptions include the Philadelphia Eagles and Baltimore Ravens. Similarly, some people can manage their financial affairs on their own, but those people are also the statistical outliers. Most of us need a good financial planner to ensure resources are being maximized and that goals are being achieved. Without proper accountability, what seems like a small task, gets put off. Eventually, enough of these tasks pile up and the client (team) is scrambling to play catch up.
A good quarterback and financial planner pay attention to the details, they hold those around them accountable, communicate effectively with everyone involved, and make the right adjustments on the fly. They keep their cool when the pressure is on, like when the defensive end is barreling down on the QB or when the stock market is in a freefall.
Just like winning Super Bowls is the primary goal for every team in the game of football, retiring successfully is the ultimate goal for many clients. Who better to help you get there than a financial planner? There is no doubt certain quarterbacks are better than others, the same can be said about the financial planning profession.
Running Back (RB)
Equivalent to dividend-paying stocks
Dividend-paying stocks often fall into the "value" category of investing. Similarly, several great running backs have been drafted in the late rounds. For example, 2017 offensive rookie of the year (ROY), Alvin Kamara, was drafted in the 3rd round, which is a great value. Similarly, dividend-paying stocks like Johnson and Johnson (JNJ) and McDonald's (MCD) can often be picked up at relative discounts whenever the markets are in a broader selloff. Why? Because these are companies that consistently generate profits for their shareholders and macro events don't necessarily reflect the company's intrinsic value.
Just like dividend-paying stocks versus growth stocks, the running back is much more consistent in terms of game-to-game production than the other skilled positions like receiver and tight end because they often get 15-20 touches per game. What makes a dividend paying stock so dependable is that the "profit sharing" cash payouts of 2%-5% per year can be reinvested to acquire more shares. The running back (dividend paying stocks) won't wow you with a 50 yard run every single play (a sudden surge in the stock's price), but often when you look back at the end of the game (5 years of owning the stock) you soon realize all those small chunks of yards (dividend reinvestments) really paid off.
Wide receivers (WR)
Equivalent to growth stocks
Wide receivers, like growth stocks, pick up large chunks of yards (dollars) at a time. Wide receivers can have games where they explode for 10 catches and 215 yards or other games where they are held in check with only 2 catches for 7 yards. Guys like Terrell Owens and Dez Bryant are notorious divas. Buying a growth stock like Tesla (TSLA) can be equally as exciting and painful, depending on when you began owning the stock. In other words, growth stocks and wide receivers tend to have a volatile persona.
Just as airing it out in the NFL and college football is in favor, growth stocks are currently the darling of the stock market in recent years. The Facebook's (FB) and the Netflix's (NFLX) of the world are the sexy names that consistently get discussed on shows like CNBC. In the NFL, you have highlight reel players like Odell Beckham Jr. and Julio Jones that constantly get showcased on ESPN. While these hot commodities get all the press, neither will single-handedly win you every game or make you an instant millionaire.
In fact, a consistently good running game is considered a must-have if you want to be a championship caliber team (Philadelphia Eagles and Pittsburgh Steelers). Yet, having an elite group of wide receivers usually do not make or break a team's opportunity to win championships (New England Patriots).
Don't get me wrong, growth stocks are a great compliment to a client's portfolio. Just don't expect them to make you instantly rich, which is a common trap investors fall for. In the end, chasing after the next Google (GOOGL) or Amazon (AMZN) leaves most feeling disappointed. For every superstar named Antonio Brown, there are 4 other guys that turned into draft busts, see exhibit A -- Justin Blackmon, Charles Rogers, Mike Williams (USC), and Braylon Edwards. For every Amazon, there are 4 other growth stocks with a dot-com behind their name that went to $0 back in 2000.
tight End & Fullback (TE) & (FB)
Equivalent to alternative investments, such as real estate and commodities
Gronk! Football fans know Rob Gronkowski is the dominant tight end in the NFL. However, most teams outside of the Patriots, Chiefs, Cowboys, and Eagles use the tight end to supplement their offensive schemes. Actually, the tight end is frequently used by offenses to create mismatches near the end zone or when an opponent is weak in coverage at the linebacker spot. Real Estate Investment Trusts (REITs) play a similar complementary role within an investor's portfolio.
REITs offer significant opportunities in terms of income and long-term growth. They also help to diversify the overall mix of investments, thus lowering asset correlations, and reducing portfolio volatility. Just like how the tight end is typically not the focal point of an offense, REITs shouldn't be the focal point of your portfolio and be limited to no more than 10% of your investable assets.
In terms of the fullback position, some teams don't even have one on their roster anymore. However, for certain offensive schemes the fullback is an integral part of the running game. The same can be said for commodities. Not everyone should invest in this alternative asset class, but for some investors it can be a nice piece of the puzzle. Especially if you want to mix in non-correlated assets to dampen volatility.
Offensive Line (OL)
Equivalent to bonds and cash (fixed income)
Every football fan knows that a great football team is built from the inside-out. The offensive line is the stabilizing force because the offense simply cannot function without the center, guards, and tackles all being on the same page. The offensive line is responsible for protecting the quarterback from getting sacked by the defense and opening up running lanes for the backs to be able to pick up hard-fought yards. Without the big boys doing their job down in the trenches, the offense falls apart.
Bonds and cash instruments (money market, savings, and CDs) operate in a similar protective fashion. They are the safety net of your portfolio and a necessity for retirees who need certainty and income. The principal investment is often stable because of features like the sound creditworthiness of a bond issuer, or bank FDIC insurance with your savings account. Furthermore, the reason bonds are perceived as safer investments than stocks is that debt holders are paid before stockholders when a company goes belly up.
Equivalent to insurance and risk management
While all the previous positions mentioned worked together on offense to accumulate points for the team, or grow your bottom line net worth. The defense is essential to loss-prevention. That is limiting the damage by your opponent. Preventing a team from scoring touchdowns and field goals are similar to an insurance policy limiting your financial damages whenever "sh**" happens.
None of us are so lucky that we skate through life without experiencing some type of loss that resulted from things like an auto accident, wind/water damages to a home, lost/stolen jewelry, an extended hospital stay, prolonged disability, or premature death. Sometimes the losses can be so catastrophic that without proper insurance coverage you have to wipe out your life savings to cover the damages. While the cost of insurance adds to your monthly budget, it will prevent you from having to hit the start over button with your financial plan. Just like a good defense in football will bend, but not break.
It's no coincidence that the Steelers are one of the best-known defenses over the last 5 decades. Their defense (like insurance is to your financial plan) is the foundation to their continued success. It's why they have more super bowl trophies than any other NFL franchise. The lesson is don't neglect your risk management plan like some NFL teams neglect their defenses. I'm still waiting for my team, the Detroit Lions, to get their acts together on that side of the ball... Maybe one day they will actually win a playoff game. Let the laughing begin.
Equivalent to saving for a rainy day
This one is pretty straightforward. No team ever wants to go to its backups just like no one wants to have to dip into their savings when the air conditioner unit needs to be replaced. However, when you have enough saved up for emergencies, it prevents you from having to borrow from a credit card or sell beanie babies on eBay, whenever the unpleasant surprises in life occur. An important point to keep in mind, if the Eagles had any of Cleveland's quarterbacks as their backup instead of Nick Foles, they probably don't make it past their first playoff game and don't win the Super Bowl.
Equivalent to the small details that add up
Hall of fame coaches Bill Belichick, Urban Meyer, and Nick Saban all emphasize elite play on special teams. It's the attention to details that matter. They are of the belief that their special teams units can be the key difference between winning and losing. The kicker, punter, coverage units, and return specialists usually don't get the glory. Yet, special teams can shift the tide of a game by blocking a punt or returning a kick for a touchdown.
What appear to be small details can have a huge impact in momentum. The same can be said in the world of financial planning about things like paying attention to your household budget, being financially prepared for life's transitions, rebalancing your investments, choosing low cost index funds, and knowing where to tax-shelter assets. The little things that don't seem like they matter really accumulate and add up to a lot of money over time.
GM and head coach
Equivalent to the client(s)
The GM and Coach are the ultimate decision makers on a football team. They work together to make key decisions on personnel, offensive and defensive philosophies, formations, and who ends up playing in the games. So too does the client get to have final say over their financial matters. The client's beliefs and philosophies will dictate their goals and outcomes. Whereas, the financial planner is there to advise, nudge, and support.
A good example in the world of financial planning is a client's willingness to take investment risks will dictate their investment portfolio allocation. Allocation refers to what percentage of money should be invested in stocks versus bonds versus cash. In football, investment allocation is the equivalent of a coach who uses a base offensive formation that is balanced, aggressive, or conservative.
The following is a basic breakdown of the formation-asset allocation analogy:
- Balanced Formation - 1 RB, 3 WRs, 1 TE = Balanced Allocation - 60/40 stocks/bonds
- Aggressive Formation - empty backfield, 5 WRs = Aggressive Allocation - 80/20 stocks/bonds
- Conservative Formation - 2 RBs, 1 WR, 2 TEs = Conservative Allocation - 20/80 stocks/bonds
Similar to investing, sometimes the formation is dependent upon the situation within the game. Just like earmarking certain buckets of money with conservative investments for a near-term purchase and other buckets of money more aggressively for a long-term goal like retirement. Whereas, the fun-money account is like throwing a hail mary at the end of the game. Sometimes you get lucky!
At the end of the day, the GM (spouse A), head coach (spouse B), and quarterback (financial planner) all need to be on the same page for the team to be successful.
Equivalent to CPA, estate attorney, insurance agent, and other trusted advisors
The head coach may have final say on matters, but the assistant coaches, specifically the offensive and defensive coordinators, are the ones barking out the plays during the game. Which means they have a significant impact on the final outcome. So to does your attorney, tax expert, insurance specialist, and trusted family and friends. Your trusted advisors are critical to maximizing your resources across the board and protecting you from the unpredictable misfortunes that occur in life. Again the quarterback (financial planner) plays an integral part with those who assist the team (support, you, the client) on important matters like play calling (tax and estate planning).
Equivalent to the media and headline news
A good fan base, like here in Jacksonville, is an important component to a team's energy. A bad fan base, on other hand, can suck the life right out of the stadium. Similarly, the news and media play a big role in affecting how a client feels about investing in the markets. The clients that are glued to the news are often the ones who sell at the worst possible time and complain that their financial advisor lost them a bunch of money. It's funny how those types tend to believe its always someone else's fault. Whereas, its the clients (like a good football team does on the road) who are able to block out all the noise that end up realizing their financial dreams and living a more fulfilling life.
Post Game Analysis
I promise there will not be any more SAT questions. For those of you who are big football fans, like myself, I hope my metaphors gave you a better understanding of what financial planning really is. A financial planner is your quarterback and you are the GM and Coach. When those 3 key roles are working well together with all of the other pieces, the team is usually happy with the outcome.
One final comment for all of Gator country. Go Buckeyes! Urban's health is much better now...