What cricket can teach us about finance

"The T20 world cup is back!

It's time to don the jersey of the team you support and enjoy the nail-biting matches. All this while, the teams focus on one objective, the world cup!

But did you know that cricket can also teach you about financial planning?

A lot of things that are used on the cricket field, like tactics and strategies, can be used to build your investment portfolio over time.

The game of cricket has its strategies revolve around factors like the ground, weather, pitch, etc. Similarly, financial planning strategies and asset allocation for you will be based on factors like age, dependents, risk capacity, goals and more.

Let us now build on what cricket can teach us about finance.

A winning team requires diversification

A cricket squad is made up of batters, wicket-keepers, all-rounders and bowlers. Within the batter category, there are different specialists like openers and middle-order batters. Similarly, you may have fast and spin bowlers.

Now imagine if your cricket team was made entirely out of bowlers. While it may be beneficial during your bowling innings, you may see your team collapse like a pack of cards when it's your turn to bat.

Similarly, in investing, there are different asset classes for you to diversify. You may select a combination of equities, bonds, real estate, etc., based on your goals and other factors.

Even within a given asset class, you should diversify. For example, not all your equity investments should be in one stock or one category of stocks. You should diversify between large-cap, mid-cap and small-cap stocks.

Have a backup!

Jasprit Bumrah of the Indian Team was injured just before the world cup. However, the team had some backup bowlers to replace him. Such injuries and other issues may not be forecasted beforehand. It is important to have a contingency plan.

In your financial planning also, it is necessary to have a contingency plan. To face immediate uncertainties like medical bills, you should have an emergency fund to which you have urgent and easy access.

The start influences the game

The first 6 overs of a T20 match (called powerplay) are the overs when the batting team can take the most risk as there are only 2 fielders on the boundary. The lower risk of being caught out in these 6 overs incentivizes the batters to play big shots. A good start can also help you set a huge score.

Your 20s can be seen as a powerplay when you generally have fewer responsibilities, and therefore you can take more considerable risks. If you start investing early, you can build a bigger corpus thanks to the magic of compounding. You may also opt for stock trading if you can take additional risks.

Take calculated risks

Trying to hit a boundary at every ball is not wise. At times, the players just look for singles and doubles. They may even decide to leave the unplayable balls. Blind hitting will only harm the team and its ability to score.

Similarly, in investing, do not always chase high returns. You should be sensible while investing. You should avoid investing in assets that you do not understand or feel are risky for you.

Past performance is not a guarantee

Many players who are known for performing well often fall short at such big stages. Some fail due to confidence issues, while some could possibly have been overhyped after performing in bilateral series or domestic leagues. The past performance of the players does not ensure they will perform similarly at the grandest stage.

In the financial world, most investments come with a disclaimer "Past performance is not indicative of future results". However, people still believe that if an investment has performed well in the past, it will perform well in the future. Such beliefs are often the reason why people lose money in investments.

Before a match, the teams do a thorough analysis of the conditions, players, and opposition to help them achieve a win. In investing as well, you should do a thorough analysis of the market, your asset allocation and investment options to help you achieve your financial goals.

Parting thoughts

Cricket has several lessons that we could use in financial planning and building our investment portfolio. The game of cricket can run from a few hours to a maximum of 5 days. But, when making our financial plans, we have a horizon that spans years.

T20 matches and the financial markets can be unpredictable and volatile. What's important is that you remain calm when things do not seem to go your way.