Large returns are what all investors seek. However, the most veteran ones would tell you that risk is the foremost metric that you should keep in mind. Diversification is the only thing in finance that improves your outcome without having to pay anything. With a diversified portfolio, you can withstand the most severe downturns. Betmarkets gives you another tool to obtain this advantage.
Grab your free lunch! – sponsored by Wall Street
On a day-to-day basis, we are told not to “put all our eggs in one basket”. Perhaps quite unsurprisingly, that is as true in the world of finance as it is elsewhere.
Diversification is one dimension – for sure a fundamental one – you should always take into account when investing. You might think that you’re protected from a downturn by investing in different markets, but if they’re closely related you won’t benefit that much.
This relationship between markets is commonly called correlation. Within finance, correlation measures the degree to which a performance of one investment influences the performance of another. The lower the correlation between your investments, the lower the risk of seeing the value of your portfolio quickly deteriorate.
To put it simply:
Diversification of investments – A tale of coconuts
Imagine a very simple case of a tropical island with two people that live in opposite ends. Each one has a palm tree that requires rain to produce a predictable amount of coconuts. They allow the person to survive that year. Every year, it rains in only one end of the island. The one whose palm tree receives rain will have a bountiful harvest. The other one will die from famine.
As with every individual, these two prefer to eat a lot than to eat in a frugal way. However, that preference is a lot less strong than the one between living – even by eating less – and dying.
To ensure the maximum well-being on the island – no one dying, that is – these two should sign a contract. There, they decide to split the production of each palm tree. Now, they are diversified because each one owns 50% of two different palm trees. Their exposure to risk – in this case life-threatening! – has gone to zero because they now know exactly the amount of coconuts they will have from the harvest.
Their well-being increased, because being 100% sure of surviving (even if barely) beats a situation of 50% risk of dying and 50% possibility of having a feast. This goes back to the utility discussion we had in this other post.
And all without paying anything to anyone to obtain this advantage.
If you only invest in shares (or any other asset by itself), albeit in different sectors/markets, you might not be racking up the benefits of a fully-diversified portfolio. This happens because almost every company is affected by the same set of factors, regardless of geography. Intertwining economies, propelled by globalisation, have recently increased this connection. Nowadays, it’s common for a crucial stock market to affect everyone around it, even if the company’s value drivers are different.
To illustrate this concern, it is common to say that “when America sneezes, the World catches a cold”. A slowdown in the United States’ private consumption, or a change in its import taxes, is certain to impact chinese companies. This means that, even if you are invested in these two markets, a change in just one of these factors might leave a dent in your portfolio.
In comparison, a fully-diversified investor has a small exposure to every risk possible because losses in some assets are off-set by gains in others.
Thriving in shaky markets
The owner of a diversified portfolio might not see return spikes as big as the ones of people who only own one asset – return to mean is to blame. Nevertheless, his/her downturns won’t be as severe since some assets will be less affected and others might even benefit. The latter is composed by companies whose business model benefits from recessions, such as bankruptcy companies.
There are also some assets, such as gold and Treasuries, for which investors turn to when the market is looking somewhat gloomy. These are called safe haven assets and are highly prized by investors because they are the ones paying-off when everything else is losing, the moments when investors need the income the most.
Currently not for everyone
Traditionally, commodities, Hedge Funds and Private Equity are what comes to mind when one thinks about these uncorrelated assets. However, they are only open to deep-pocketed investors who have established both a foothold and a reputation in the market.
Most retail investors will hold a combination of cash, stocks, bonds and real estate. These investments’ connection to each other has been shifting since the global financial crisis and they are now more connected than ever before. Diversification benefits from holding just a combination of these have never been smaller.
With the growing relationship between these investments, these investors need something else to truly diversify their portfolios.
What individual investors can do if they’re not part of the 1%
Some have shifted to trading in Forex and Binary Options (incredibly risky), others to P2P Lending or even to cryptocurrencies. The latter has been a favourite during 2017’s exponential run, but their lack of intrinsic value has proven too significant of an obstacle for the market to be able to sustain its increase in value.
There, we have seen products like ours appearing, offering the services of experts for whoever wants to replicate them.
However, those services in crypto present an unsolvable issue, for now: how to distinguish the experts in a place where everyone has shown tremendous profitability simply because the market was skyrocketing?
In a few years, after the cryptocurrencies market has stabilized, track records will separate the true experts from the regular traders, but that is not possible as of now. On the contrary, that is exactly the current landscape of sports betting.
Since you’re expected to lose against the house when betting, those who consistently win need to have found a certain advantage.
What we propose is the creation of a new asset class within the world of sports. We want you to be able to invest in sports betting experts with verified track records and that went through a rigorous screening process.
Are we pioneers in proposing this? Not really, business moguls such as Mark Cuban have been quite vocal about the opportunities in this market from as early as 2004:
“I’ve decided to start a new hedge fund. However, this hedge fund won’t invest in stocks or bonds, or any type of business. It’s going to be a fund that only places bets. A gambling hedge fund. It won’t be me figuring out what bets to place, or what games to play. This is a fund. I will find the best and the brightest, with a confirmable track record and hire them.” in My New Hedge Fund from Blog Maverick (November 27, 2004)
As a market where most people lose money, there are opportunities for those who have an edge. These professionals have shown that they can profit from sports betting. To know more about why the average player loses in this market and what you can do to overcome some mistakes, check our post Can you profit from sports betting?.
Through Betmarkets, we give you access to these sports betting experts and negotiated with them the complete removal of all upfront fees. In complete disruption with the traditional way of operating, these experts will only make money when you make money.
A great addition to any portfolio
Besides the advantages listed by Mark Cuban in the linked blog post – full access to information, strict regulation (constantly enforced unlike the one of the SEC, in financial markets), among others – we would like to add another one that we think that is fundamental. And that is diversification.
Investing in the experts available in our platform is not affected in any way by the overall market conditions. In this sense, even during recessions such as the dotcom bubble and the global financial crisis, this investment would remain unscathed. Why would a crash of the financial system in America affect the performance of an Australian horse racing expert? The latter will, on average, tend to keep its performance even in the worst downturns.
There is a second motive of interest here. When considering all our experts together, they are also independent amongst themselves. As in the case of American banks and Australian horse racing experts, why should a Brazilian football expert’s performance influence the return of a Spanish tennis expert? Even within our platform, you should follow several experts from different sports to protect yourself from continued losing streaks. We recommend following 10, and never fewer than 5.
We believe that our platform has the potential to outperform the S&P500 and other major stock indices in both upturns and downturns.
We’ve conducted some backtesting in our paper portfolio – with equal participation in all experts since the start of each service. If you had invested €1,000 in 2015, followed all experts, and had average stakes of €10 per bet (1% of your bank), you would have now €3,162. This performance has been attained with more than 70,000 bets placed, too many for it to be just a simple “lucky run”.
For comparison, if you had invested that same amount in the S&P500 you would have now €1,407. Still an amazing return, though, given the great performance in the past few years! Investing in the MSCI World Index would have increased your investment to €1,301 and in the EuroSTOXX600 to €1,126.
Bonds (safer) would have given you a lot less. You would only have gained €59 in these ~3.5 years by investing in them (source: Bloomberg Barclays Aggregate Bond Index).
In addition, our portfolio exhibited a very small annual standard deviation – the main measure of risk – of 2.5% due to the previously referred independence amongst the experts. The stock indices had 10-15% of annual standard deviation in the same period. The huge difference is explained by the strong correlation among companies present in the same index.
You should be prepared
Nevertheless, we defend that investing in our platform should be approached as an extremely risky investment.
Always make sure it fits your investment profile and only dedicate a small part of your portfolio to it. Bear in mind that past performance is not indicative of future performance. Always seek professional investment advice.
Does sports betting fit your profile? Awesome! Register now in Betmarkets and start following our sports betting experts!