The ball, the pot and the brain

Published on: 7 June 2024

Soccer and pensions. Are those things related to each other at all? As Cruijff said; “I’ve never seen a bag of money scoring a goal.” Yet, they do have a few things in common. Both are related to human behavior. Following the kickoff of the European Football Championship on June 14, there are a number of things we need to pay attention to as viewers. And those concerns are comparable to our pension investments. Especially after the “kickoff” of the renewed pension systems, when the first funds will be transitioning starting on January 1, 2025. Here is a viewing guide for you.

The ball is round. On the field as well as in the stock market, chance plays a big role. Is the winning coach always right, or sometimes just lucky? Co Adriaanse once called judging a match solely on the final result, “scoreboard journalism”. Investors would also do well to consider not only the ultimate return, but the exposure to risk along the way as well. For example, partially hedging the risk of a falling U.S. dollar is prudent because this type of risk does not pay off in the long run. But in a period when the dollar happens to rise, you benefit less. In and of itself, a sensible policy, which may, however, produce a worse outcome on the “scoreboard”. And remember that it is only an intermediate position.

A coach who lines up a team that is primarily offensive knows that many goals will be scored, just not on which side. Adriaanse was right: it’s silly to call that decision “stupid” or “brilliant” in retrospect, depending on the final outcome.

Losing is no fun. It hurts twice as much as winning brings joy. That is why the three-point system was introduced in soccer – it makes winning more attractive and prevents too many ties. Something similar applies to financial markets too. Precisely because losing feels so bad, investors can earn a risk premium on stocks. Running away from investment risk sounds prudent, but saving for a good retirement risk-free is unfeasible and unaffordable. You won’t win the European Championship with eleven defenders either. Or another one from Cruijff: “You can’t score without shooting.”

The tendency to avoid risk disappears when people are losing. That’s when they start looking for risk. On the soccer field, we sometimes see that when we are behind, a defender is exchanged for a striker. That increases the chances of goals, but also of goals against them, of course. The latter statistically occurs most often. Not substituting turns out to be strategically the best choice. It is also better for investors to stick to the strategic policy after a stock market crash.

That action bias - the feeling of having to do “something” - also plays out with goalkeepers. They usually dive to one corner when a penalty is awarded, even though the really good penalty takers wait for that and then choose the other corner. Other players sometimes parry it straight down the middle. So, it is better for the goalkeeper to stand until the very end. Or at least sometimes. The unpredictability increases the pressure on the penalty taker and thus makes the penalty kick more difficult. Why do “early diving” goalkeepers choose a suboptimal strategy anyway? Apparently because staying put looks like you didn’t even try. But that is bad advice. Even in turbulent times in financial markets, standing still is often best. With a well-diversified portfolio, there is even some extra return to be had.

Armed with these insights, you may soon look differently at the European Championship, but also at the stock market and your pension pot. The similarities between soccer and investing are offset by an important difference. Investors can put together a portfolio that performs reasonably well in very different circumstances. For a seasoned Orange fan, there is only one satisfying outcome: bringing the “Henri Delaunay Cup” to the Netherlands. The risk of disappointment cannot really be properly insured. In the unlikely event that another country does make off with the cup - a rather theoretical scenario of course - we can at least hold on to the fact that the scoreboard doesn’t tell all.


Charles Kalshoven is a macro-economist and expert strategist at APG