Even if you are not a football fan you will have seen that Tottenham Hotspur has sold its star player, Gareth Bale, to Real Madrid for a world-record €100m. Even in the profligate world of elite football, that’s a staggering sum of money. Just how much is illustrated by Tottenham buying seven players, for about the same amount of money, to replace him.
Although Bale was outstanding last season, Spurs knew that the talent of one player is fragile. So despite watching their best player depart, many of the club’s fans are pleased with the club’s transfer activity.
There are parallels in investing.
Three years ago, Gareth Bale was a useful and promising squad member with a specific and well-considered role in the team. His manager might have been delighted with his improvement as a player but worried that the team was becoming too reliant upon his individual performances.
In the same way, each asset in a portfolio should have a well-considered role and, just as White Hart Lane held its breath every time Bale rolled around clutching his shin, investors should worry when an asset does well and begins to dominate the overall performance.
How Tottenham handled the sale of its top player is rather like how a good adviser manages the changing values of the investments in their clients’ accounts. They make a cool-headed decision about the right balance of assets for their clients and, when the rising and falling value of the funds alters that balance, periodically bring it back to the point they think is right.
A football club’s chairman makes a difficult decision to release a player that is performing brilliantly, just as advisers make counter-intuitive decisions to sell assets that are performing well.
Spurs fans are optimistic because their club’s activity in the transfer market rebalances the team and might increase the chances of reaching the clubs goals at the end of the season. The periodic rebalancing of client’s portfolios is intended to do the same, albeit with a longer time horizon.