DALLAS, TEXAS – MARCH 22: Dallas Mavericks owner Mark Cuban reacts during a timeout in the game … [+]
Fandom can both have huge benefits, and deep, deep risk. When investing, it’s best to leave your fandom for other activities.
This downside to fandom became obviously apparent to me this week, when it was reported that Dallas Mavericks owner Mark Cuban has agreed to sell a majority stake of the franchise to the Adelson family. The Adelsons, best known by their now deceased patriarch’s Sheldon Adelson, runs the Las Vegas Sands
LVS
Cuban has lobbied Texas politicians to legalize gambling in the state, according to reports. The same reports indicate that the Sands and Cuban have discussed building a casino district in Dallas, which would include a new stadium.
What does this all mean for fans of the Mavs? Who knows. Maybe Texas legalizes gambling and the Sands use their ownership to greatly improve the financial picture of the Mavericks. Or Texas doesn’t, and the Adelsons grow frustrated and move the Mavs to Las Vegas. But as a fan, I’m stuck with whatever these few people decide about the team I’ve cheered for since growing up in the DFW area. It’s an uncomfortable position.
There’s no index fund like tools for fandom. But it’s common to see investors have a similar response to certain investments, whether someone wants to bet big on Tesla
TSLA
If your fandom interferes with your investing process, then it’s time to reconsider how you invest and why.
The Value of Spreading Your Risk
Unlike sports, there’s no reason to fear becoming a fair-weather fan when investing. In fact, that’s the whole value of index fund investing. You’re capturing the gains of the market by leaning on winners when they become winners.
At the end of October, the S&P 500 had seen a year-to-date return of 9.23%. Of the 500 names in the index, only 58 names were up 25% or more while another 72 fell 25% or more, according to S&P Dow Jones Indices. During the market rally following the COVID-19 recession, a handful of technology stocks drove returns.
This is a common scenario, one that often occurs during market gains. But there’s a benefit that you have by selecting the index fund versus cheering on one name: you do not have to predict which stocks will rise. Instead, you invest with the belief that, over time, the index will rise a certain percent – with most years coming in well above or well below that mark. When spanning years and decades, though, it creates returns that match your needs for the future.
It doesn’t require a last second half-court heave in your favorite stock to secure your wealth.
You Still Own Your Preferred Name
The benefit of the index fund, even when you’re still hung up on the stock that your friends talk about or the asset that everyone seems to be clamoring for, is that in most cases, you can find an index fund that holds the asset that you’re enamored with.
Tesla is in the S&P, for example. In fact, for those interested in Tesla, the S&P 500 has been a place to protect against Tesla’s performance.
Allen Sloan, writing for Barron’s, discussed in mid-November that since Tesla joined the S&P 500 in Dec. 2020, its total return has been 4.82%. The total return, which includes reinvested dividends – of which Tesla does not pay any – for the S&P 500 during the same time was 27.02%.
Essentially, it paid to put the fandom aside, while still holding the name in your index fund. Plus, you will still gain if your belief in the stock eventually pays off.
Take Small Bets
When it comes to NBA basketball, I’m a Mavs fan first. Sure, I like other players and teams, but I’m all-in on the Mavs.
Even if you want to avoid an index fund for certain assets – like bitcoin, for example – you can still relegate it to a small part of your portfolio. By decreasing your exposure to, say 5% or 10%, you’re putting most of your eggs in the index fund basket and hoping for the best in the smaller portion of your portfolio that may (or may not) outperform.
The one caveat for this portion of the portfolio? You must be okay if it never returns a dime or, even worse, becomes worthless. If you’re comfortable with that, then taking a small bet can pay off.
But by doing so, you have simply become a fan. And that can be a helpless feeling when something unexpected occurs.
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