When the World Cup final is played on 15 July, there is plenty at stake for the two countries contesting for the top prize in international football.
It is not just glory and fame at stake for the managers, coaches and players.
The teams would also be fighting for their nations' stock markets and economy.
The winner takes it all? Not quite
A Goldman Sachs Global Investment Research from 2014 found that World Cup winners and runner-ups have rather contrasting fortunes in their stock markets.
The euphoria from winning the World Cup seemingly extends to the winning team's stock market.
On average, the research found that the winning country's stock market outperforms the global market average by 3.5% within the first month.
Unfortunately, the feel-good factor does not last long.
After another two months, the winner's stock market is only 1.8% better than the global average.
And within a year, the World Cup victory has been all but forgotten, with the winner's stock market performing 4.0% lower than global average.
Nobody wants to be second
There is a common saying in soccer that nobody remembers the losing team in a final.
There is more at stake than just bad memories for the losers.
Even though coming in second in the whole world is not a shabby effort by any means, countries would really want to avoid losing in the final.
This is because the runner-ups in the World Cup tournament have traditionally had a terrible time in the stock market after the loss.
In the first month after the World Cup final, seven of the last nine runner-ups' stock market performed at 1.4% below the global market average.
And it gets even worse – the slump continues into the next two months, with an average relative fall of 5.6% over the three months.
The good news is that things do pick up after that and by a year's time, the loser's stock market would be underperforming by just 0.4%.
No time for the markets during matches
Men, it seems, cannot multi-task when watching football.
European Central Bank researchers found from studying the 2010 World Cup finals in South Africa that when a particular team was playing a match, its national stock exchange was pretty dull.
When a particular stock exchange’s national team was playing, the number of trades dropped by 45% and trading volumes were 55% lower. Even during matches that do not involve the particular national team, trading numbers dipped by 24%.
In one particular example, the number of trades on Chile’s stock exchange fell by 83% when the team was playing. In fact, Latin American teams’ stock exchanges are among the top markets affected when their national team played.
The dip in activity starts before the match kicks off and continues even up to 45 minutes after the final whistle is blown. At half time, dips are still around 35%.
The report also noticed further dips of about 5% in trading activity when a goal is scored.
Investors may think that the markets in the United States may not be affected much as football is relatively not as popular there. This year, the US team also did not qualify for the World Cup finals.
However, the reality is that the US stock markets also suffer a dip during the World Cup.
When investors’ focus is on what goes on in the field, the potential for scoring an ‘own goal’ in investments is higher.
The limited attention investors pay to the stock markets during match days affects the price discovery process due to thinner market liquidity.
This means that relevant news that might typically affect the markets would not be reflected in market prices as quickly as usual or may cause wider price gyrations due to the lack of liquidity.
Stock markets difficult to predict
If you think picking which team is going to win the World Cup is challenging, stock markets are even more difficult to predict.
Just like in a football match, extreme emotions of greed and fear reign in financial markets.
But footballing principles can guide investment strategies.
Strategise first: All successful football teams go into the match with a strategy and a formation to win. This team strategy exploits the weakness of its opponents and takes advantage of its own strengths.
In investing, it’s the same concept.
There is a need to have a good understanding of what you are investing in.
More than that, there is need to have a strategy in place.
The principle behind all good investment strategy is diversification.
This year, the need for diversification is more important than ever.
As the world enters into a later stage of the economic cycle, idiosyncratic events can trigger unexpected losses.
The investment strategy is to build a portfolio that optimises the benefits of diversification.
Just like the interplay of free-flowing football between defence and attack, there is a need to combine traditional and non-traditional assets, risky stocks and defensive bonds, and allocating across regions is crucial in making portfolios profitable in good times and to preserving gains during downturns.
Be Flexible: The football team that wins is the team that is able to adapt to unexpected changes such as a red card or an injury.
This is the same with investing.
This year, the tide has turned in the financial world. The pendulum has swung from free-trade to trade war.
The tide has turned from easy monetary policies to more restrictive monetary policies.
The change in tide will create greater unpredictability in markets. Investors have to be flexible to adapt to these changes.
Investments that work in yesteryears may not work as well in the years ahead.
There is a need to be more nimble and to adjust strategy as the financial condition changes.
Control your emotions: Many world cup winners are decided on penalty kicks.
Taking the decisive penalty kick is a test of nerves.
Even world class footballers like David Beckham and Roberto Baggio cracked under the pressure of a crucial penalty kick.
Controlling emotions can be the decisive factor between victory or defeat.
Investment decisions are the same. How do you stay calm and remove emotions in investing?
The ability to discern between deteriorating fundamentals and the noises is key to investing. The former is a reason to reallocate a portfolio, while the latter an opportunity to take profit on a hedge or to double-down on an existing position.
Very often, emotions such as fear will cloud investors to make the wrong decision – taking profits too early or holding onto a loser for too long.
One way to take emotions out of the equation is to allow professional manager to manage on your behalf.
With a professional portfolio manager, there is a proven investment process in place and the ability to stay focused on investor’s objectives.
This can make a big difference for an investor’s long-term ability to optimise returns.
*A version of this article appeared in The Sunday Times on 10 June 2018.Disclaimer applicable to recommendation
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