Match ups (The Financial Athlete #60)

Basketball is all about match ups. A team should not expect an easy victory over Team X under the rational of “Team Y slaughtered team X, and we beat Team Y with our bench!” Team X may match up much better against your team than Team Y.

A basic function of financial planning is to match investments most suitable for you. We are all unique. And we have different levels of tolerance for risk, although most of us overestimate our own risk tolerance. To get an idea of how you should invest, first recognize what mode you’re in and then act in a prudent manner from that mode. My tennis instructor classifies these modes as: Survival, Defense, Neutral, and Offense. He says, “In a tennis game, we always hit the ball from one of these four modes.”

Survival: I return a difficult shot anywhere over the net just to keep the ball in play. My body is not positioned for good court coverage. I hope my opponent makes an error or I’m able to get back into a defensive move.

Those who are on Survival mode have the greatest need to secure cash. They are in no position to put their money at risk. They must only invest in their well being by putting food on the table and shelter over their heads.

Defense: My opponent is in command of the rally, moving me left and right. I am not trying to hit winners. I am keeping the ball in play. My court coverage is solid.

Many of the elderly are on Defense mode. They don’t have the luxury of “time on the market” to wait for stock prices and real estate prices to rebound from a down market. Their goal is preservation of capital, not return of capital.

Neutral: Both my opponent and I are keeping the ball in play. We hit the ball over the middle of the net to minimize errors.

Those who are on Neutral mode have cash on the side and wait patiently for better investing opportunities. Until the market becomes more conducive to investing, they remain on Defense mode before transitioning into Offense mode.

Offense: I am in command of the rally. If my opponent continues to return my shots, he probably will tire and lose the point.

Those who are on Offense mode are aggressively putting cash into equities and/or real estate to make higher returns. They have timed the market when market prices are below intrinsic value.

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