Personal Finance for Sports Fans – Diversification is Key

March 16, 2007

How can you have the best player in college basketball on your team and still lose your conference championship? Just ask the Texas Longhorns.

Star Power Fades
In the final game of the Big 12 tournament, Kevin Durant laid it on the Kansas Jayhawks in the first half. He shot the lights out and at one point Kansas’s 20 point deficit seemed to be insurmountable. However the tide turned for one main reason, the mighty Durant ran out of wind in the second half. Despite 37 points and 10 rebounds from their star player, the Longhorns fell to the Jayhawks and lost the championship.

Diversification Wins in the End
Why did Kansas come out on top? Diversification. The have a multitude of skilled players that all contributed in their own way to the victory. The importance of diversification is no different for your investment portfolio than it is for a sports team.

Just like the Longhorns rode Durant’s success in the first half, you can rely on the outstanding returns of a single investment to grow your holdings by 20, 30, or 60% in a year. However, the second half will inevitably come for that investment and it will stop performing at that level. History has shown that over time it’s not a matter of if but rather when an investment will turn south.

How can we win like Kansas? Invest in a balance of various industries and different assets classes. Although spreading our money out over the broader market will reduce the potential reward it will also cut down on the potential risk. Instead of one super star investment, divvy your money up among solid performers and you’re more likely to come out ahead in the long run.

Check out the other articles in the series Personal Finance for Sports Fans

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Ben
Ben Edwards, the founder of Money Smart Life, saved up enough to buy a Nintendo back when he was 12 years old. When he used the money to buy shares of Wal-Mart stock instead, he knew he wasn't like the other kids... His addiction to personal finance has paid off for his family and now he's helping you to afford the life that you want. Check him out on the web at Google Plus, Twitter and Facebook.

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