Lessons from the World Cup About Diversification
June 16, 2014The 2014 World Cup started with a bang on Thursday with the host nation Brazil beating Croatia in a somewhat less than convincing fashion. National pride and hope is growing in the host nation of Brazil and across the globe with 32 nations vying for the World Cup trophy. Like many American soccer fans, I’ve enjoyed watching other countries play the past few days… but now the real fun, stress, and patriotism begins. The United States takes on Ghana today.
It’s such a fitting start to play in the so-called “Group of Death” considering that Ghana has knocked us out of the last two World Cup competitions. It doesn’t get any easier for us Yanks as next we have to face soccer powers Portugal (June 22) and Germany (June 26). Americans have globally been viewed as outsiders in soccer world’s elite list of World Cup contenders and aren’t expected to do much this time around. Perhaps that explains why the unofficial U.S. Soccer supporters club is called the American Outlaws.
Call me crazy (or just patriotic) but I feel that despite the U.S. National Team’s long shot odds of winning or even making it into the knockout round of 16, anything can happen. Soccer chants allow for fans in the stands to be part of the game (but they can also garner curious stares if you are watching a game in public and decide to get your own solo version going.) Why not join in on that optimistic chant that the Americans have embraced?
I Believe That We Will Win!!!
Or when in doubt, just stick with the classic U.S.A., U.S.A., U.S.A.!!!
In the investment world, almost everyone understands that U.S. investments aren’t always #1. (Still our nation’s investment track record is better than our soccer history where we haven’t finished #1…yet.) If you take a look at the 20 year snapshot of asset class returns, you’ll see that each asset class performs better in some years than in others so it’s difficult to accurately predict the winners and losers in advance just like it may be hard to predict who will provide the strongest challenge to Brazil in the World Cup. That’s where maintaining a diversified portfolio is essential to spread risk across different asset classes and across different geographical locations.
As a soccer fan, I plan on doing the same just in case the Yanks get knocked out of the World Cup. I will be spreading my viewing interest across other countries just so I can participate in the ongoing soccer saga as it unfolds. Just like my own investment portfolio, the majority of my attention will be on the United States. That doesn’t mean putting the blinders on everything that occurs outside the U.S. though.
Many investment professionals recommend putting up to 25% of a total portfolio into international stocks depending on risk tolerance. For the most aggressive investors, a small amount (usually no more than 5-10%) is often suggested to be put into emerging markets- developing countries experiencing rapid growth and industrialization. You can use resources such as FutureAdvisor.com or AAII.com to obtain some asset allocation model suggestions.
Each investment company tends to have a slightly different take on what constitutes an optimal portfolio so be sure to check out models provided by Vanguard, Fidelity, Schwab and others. A quick glance at various target date funds can also provide some insight into how much exposure your investment portfolio should have to international investments. One thing that is generally found among various suggested asset allocation models is a recommendation to diversify globally.
So if you are a soccer fan or just want to act like one for a few weeks, you should go down to your local neighborhood pub or join friends and family for a few soccer viewing parties. Cheer on the USA (or your native country if you must) and remember that soccer is a global sport. Since it’s easy to let our personal finances get pushed aside during the summer, why not also think globally next time you look at your investments and carve out some time to review your asset allocation?
Obviously, the blatant attempt to find a connection between my passion for U.S. soccer and diversifying investments internationally is proof that World Cup fever has taken over my life for a brief period of time. Hopefully this commentary has also provided a little insight into the importance of diversification. Good luck to the United States men’s national soccer team!