What football can teach you about building a diversified portfolio

Kyle Caldwell explains how investors can take inspiration from football team selection when building fund portfolios.

21st June 2024 10:16

Football fever is sweeping the nation once again, with England one of the favourites to win Euro 2024. For investors, parallels can be drawn with the beautiful game, particularly when it comes to team selection.

In common with football, when an investor puts together their own investment portfolio, it is important to have a mixture of attributes and skillsets. Doing so helps to achieve balance and diversification, which helps to reduce risk.

Here, we run through the types of investments that fit into each position.

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Goalkeeper

The foundation of a successful football team is a goalkeeper who’s a safe pair of hands. In the investment world, there’s always risk involved, but one area considered very low risk and paying an attractive level of income at the moment is money market funds. They are currently yielding around 5%. Check out our guide to money market funds for more detail on how these funds invest. We also recently recorded a podcast episode explaining how money market funds work.

Cash is another option. However, it would be a mistake to view cash as “risk free”, due to the fact that over the long term inflation tends to erode the real value of money on deposit. To try and beat inflation it makes more sense to invest your money in the stock market, despite the ups and downs. As the 2023 Barclays Equity Gilt study points out: “The long-term case for investing in risk assets is strong, in particular when considering longer investment horizons.”

The study, which looked at the performance of UK equities against UK government bonds and cash from 1899 to 2022, found that over any two-year period the probability of equities outperforming cash is 69%. Over a 10-year period, this rises to 91%.

Defenders

Like in football, in the investment world you want your defenders to give your portfolio protection and limit losses as much as possible.

Defenders might include bond funds and wealth preservation investment trusts.

For the former, flexible bond funds are worth considering, as such funds have the ability to invest across the bond market and are able to quickly make changes to protect and profit from interest rate movements. Two flexible bond funds recommended by interactive investor are Jupiter Strategic Bond and M&G Global Macro Bond. Check out our recent feature, which pitted the two funds against each other.

Wealth preservation investment trusts, which include Capital Gearing (LSE:CGT), Personal Assets (LSE:PNL) and Ruffer Investment Company (LSE:RICA), aim to protect capital when stock markets fall sharply. This trio has plenty of defensive armoury, including inflation-linked bonds and gold. These trusts are expected to lag the pack in rising markets, but should be towards the top of the table when stock markets hit a rocky patch.

Midfielders

In the middle of the pitch is where you want your solid core holdings. Many funds could be go in, which creates a selection headache.

For a defensive midfielder, a multi-asset fund could fit the bill, such as Artemis Monthly Distribution. This fund aims to profit from rising markets and protect when markets fall through by holding 60% in shares and 40% in bonds.

In central midfield, a global fund provides more offensive exposure, but with less risk than a fund that just focuses on one region. Options recommended by interactive investor include F&C Investment Trust (LSE:FCIT), Fundsmith Equity and iShares Core MSCI World ETF.

Strikers

At the top end of the pitch, you want the attackers to, hopefully, add most value over the long term. This is where you consider more adventurous options, such as emerging market regions or funds that focus on specific themes, such as technology.

Options for this part of the portfolio may include Scottish Mortgage (LSE:SMT), Fidelity China Special (LSE:FCSS) and JPMorgan Emerging Markets (LSE:JMG). The trio are all members of interactive investor’s Super 60 investment ideas.

However, like strikers, remember that certain investments can fall out of form over short periods.

Substitutes

To keep on extending football analogies, having funds ready on the bench to put into play is a useful tactic. The main reasons to consider selling a fund include when performance does not meet expectations and when a fund manager leaves by joining a rival or retiring.

Having a reserve list of ideas means investors can swiftly make changes as and when required.

Like in football, it is also important for a portfolio to maintain its shape by avoiding taking on too much risk. Reviewing a portfolio a couple of times a year and rebalancing helps to achieve this.

In a nutshell, rebalancing involves looking at your winners and converting some of those paper gains into real profits. Some of the proceeds could then be reinvested into areas of the portfolio that have been underperforming, but which may soon recover their poise. Doing so maintains the level of investment risk the portfolio aimed to achieve when it was first put together.

These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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