Defense Wins Championships

As 2018 ended, two seemingly unrelated storylines were impossible to miss.

The first was the wild gyrations of the stock market. The S&P 500 index had its worst showing ever on a Christmas Eve and then, just two days later, followed up with a “Santa Claus rebound” that saw the Dow enjoy its largest single-day gain in history. For fans of college football, the big second storyline boiled down to this: Could any college football team stop the University of Alabama’s offense?

Though they may seem completely unrelated, these two narratives have something in common. Headlines inevitably gravitate toward the drama and excitement of a high-octane offense in football, just as they follow the ups and downs of the stock market. 

But for people with long-term financial goals, it’s helpful to remember the old football adage that “offense sells tickets, but defense wins championships.” The saying, coincidentally, is attributed to former Alabama coach Bear Bryant. 
 
Offense vs. Defense
Football can be a great metaphor for your financial life, but it’s important to define what offense and defense really mean.

Because it gets so much attention, offense is more familiar to most of us. It’s the investment vehicles—individual stocks, mutual funds or even private equity or hedge funds—that can deliver the big returns, but can also lead to big losses. A football team’s offense, especially one that involves a lot of passing, is similar because both can deliver big gains but also suffer big setbacks in the form of interceptions and sacks.

By contrast, defense is about protecting hard-earned gains—be it a lead, or field position or your savings. We all know how hard it is to stash away and preserve money that isn’t needed to pay for housing, groceries or life’s other necessities. A good defense helps to protect that money with investments and strategies that deliver modest gains but also provide protection against losses. 
 
What Accounts Are Most Defensive?
Having a percentage of your portfolio positioned for defense is one way to reduce the impact that downward swings in the stock market can have on your family’s long-term financial goals.

The defensive stalwarts that help protect a family’s overall financial health include: money market accounts, certificates of deposit (CDs) and high yield savings accounts. While they each have their own distinct characteristics, what they all share is that they offer very low risk, as they all come with FDIC protection. Many of them are also highly liquid assets, meaning that they can be accessed easily and without incurring penalties. Having money in these types of accounts is sometimes referred to as having cash investments. 
 
Defense Is Strategic
Don’t think that having a lot of low-risk investments automatically means that you can’t achieve your long-term financial goals. A study of nearly 2 million American households with investment portfolios of $3 million or more found that more than 22% had between a quarter and half of their holdings in cash. 

Likewise, legendary investors like Warren Buffett and Charlie Munger are known for maintaining large reserves of cash, which they patiently hold on to until they see low-risk, high-reward investments to pursue. It’s a concept known as keeping your powder dry.

Having a significant chunk of your savings in low-risk and highly liquid investments is also an effective strategy for riding out the inevitable ups and downs of the economy and stock market. Having defensive investments also means there is no need to cash out a portion of your stock portfolio to meet your daily and monthly financial obligations.
 
Invest in Offense, Too
None of which is to say that it’s wise to think only about preserving the money you invest. Growth is important for all investors. And remember, the very best football teams have both a powerful offense and a stingy defense. You should, too. The answer about how much to focus on offense or defense comes down to another tool of great football teams: the right game plan.

Deciding how to allocate your money into offensive and defensive investments comes down to how much risk you’re willing to bear and your overall investment timeline. If you cringe every time the quarterback throws a deep pass, you may want to allocate less money into stocks. And a strong defense is particularly important as you near retirement and need to preserve what you’ve spent a lifetime saving.

These are obviously all very personal considerations. But always remember this: A team has never lost a football game when its defense doesn’t surrender any points. And building up your own defense can put you on the road to a financial championship.

 

A former editor at Los Angeles magazine, Chris Warren's writing has appeared in publications ranging from Institutional Investor and Forbes to National Geographic Traveler, Oxford American and Greentech Media.

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