Fools who live outside the South may have a hard time understanding just how important football can be to many people. Yet the way football games are played can teach us about investing as well.
Make the most of opportunity
A few weeks ago, my beloved Georgia Bulldogs thoroughly trounced their cross-border rival Auburn, 45-20. Georgia used 62 offensive snaps to amass an astounding 417 yards. All but 65 of those yards came on only 14 plays. The game hinged on those key plays for big gains. In investing, many returns depend on a few key months. Sitting out a few of those months will yield a dramatically lower result.
For instance, according to Roger G. Ibbotson, professor of finance at Yale School of Management, a $1 investment in the S&P 500 in 1925 grew to about $2,700 by the end of 2005. But if you had missed the best 39 months of those years because you were timing the market, that same investment would be worth about $17.
Similar results were found over shorter time frames. From 1985 to 2005, a $10,000 investment would have grown to more than $95,000, but missing the best 17 months would drop that return to about $23,400.
As you can see, trying to time the market can put your portfolio at a huge risk. If you sit on the sidelines during those key months, you'll likely fall short of the goal.
A balanced attack
Furthermore, diversification is critical. Of those 14 plays in the Bulldogs' game, eight were passes, and six were runs. Similarly, when you have a well-diversified portfolio, you've got a balanced offense that's ready to take on any market conditions.
That's where mutual funds can be handy. The right fund gives you instant diversification. Whether you're interested in big names like ConocoPhillips
Good luck with your investments, and go Dawgs!