By Steve Hiraga
As a fan of the NFL, I paid a moderate amount of interest to the impending free agency of Ndamukong Suh, assuming that the Lions would find a way to resign him, or lose him to a team like the Philadelphia Eagles, who were feverishly cutting salaries leading up to the free agent signing period.
As a lifelong fan of the Miami Dolphins, my interest grew as reports suggested that the Dolphins had positioned themselves as the favorite to sign Suh. He is among the elite at his position and in the prime of his career; a requisite piece for any team seeking a championship.
As a financial advisor, I see an acquisition like that and can’t help but wonder, “Why is that player worth it?” Worth (or value) can be a complicated concept, but in the context of the NFL, general managers must construct their team within the limits of the restrictions placed on all teams. Specifically, in 2015 teams have $143.28 million to spend on 53 players, an average of $2.7 million per man. The Dolphins just elected to spend $20 million, or almost 14% of the salary cap on one player. Not to mention the fact that this is just 1 year of a 6 year commitment. Prior to Suh, wide receiver Mike Williams accounted for their highest cap hit at about 8.5%.
I immediately think of a recurring disclosure that I see nearly every work day; past performance is not a guarantee of future results. Unfortunately, I can’t accurately predict the future, so as an advisor I make asset allocation recommendations in at attempt to create well diversified portfolios that will perform over time. When one of those assets begins to perform well, my clients are already positioned to take advantage of those gains. When one of those assets performs poorly, it doesn’t drag down the entire portfolio. Should Suh underperform his contract due to injury, coaching, or anything, he will be a drag on the Dolphins’ portfolio that is its roster. However, if he outperforms his contract and continues to be a dominant force then the rewards (revenue) that accompanies that will be well worth the cost.
Investment risk accompanies the signing of any player. Teams who use the maximum amount of salary to build a roster lose the liquidity which would allow them to react to market opportunities that present themselves throughout the terms of their highest paid players’ contracts (Miami likely won’t be signing the crown jewel of the free agents of 2016). Internally, teams must understand their own risk tolerance and reconcile that with the cost and value of their other assets. Teams must also understand their goals; win championships as soon as possible or prepare for a title run in a few years; spend efficiently and build through the draft or spend liberally on high priced free agents.
Come the end of the 2015 NFL season the Dolphins will have an opportunity to review results and their asset allocation strategy and then evaluate how they should reallocate for the next season. Trade, cut, or stand pat with Suh and the other 52 investments on their roster and continue on the road to accomplishing their goals. As an individual investor these are the decisions you are faced with as well. What are your goals? What process and plan are you implementing to achieve your goals? Is that plan working? How are you allocating your assets?
At Smith Bruer Advisors, we are in the business of empowering our clients to answer those questions and make decisions regarding their financial goals, understanding risk, and creating diversified investment portfolios. Let us empower you.