How March Madness Is Like Investing
As March Madness approaches, basketball fans eagerly anticipate the season's thrilling upsets, underdog victories, and lopsided games. Similarly, like investing, filling out a bracket demands careful consideration of risk, reward, and expectations, with winning a pool ultimately requiring a touch of fortune. By taking cues from March Madness, we can apply some valuable investment lessons.
Lesson #1: Forget Perfection, Position Yourself Strategically
The chances of filling out a flawless bracket are slim, just as the odds of consistently selecting top-notch investments in the market. This can make both the process of approaching March Madness and investing seem intimidating.
However, succeeding in investing requires concentrating on what you can manage. This may entail creating a portfolio that is strategically positioned to maintain return premiums, such as size, value, or profitability that can enhance risk-adjusted returns. Other controllable aspects include asset allocation, reducing investment costs, minimizing taxes, and more.
Lesson #2: Don’t Let Past Performance Dictate Future Decisions
Just as relying on a previous team's success to influence your bracket picks can lead to disappointment, basing your investments solely on past performances will generally yield similar results. As an investor, assuming that your "top pick" from the past will perform similarly in the near future is unwise.
Additionally, it's essential to recognize that luck can often play a role in a successful season, just as it can impact asset managers' performance. Although your bracket pool or asset managers may be skilled, it can be difficult to determine whether it's skill or chance that aided their success. It's common to witness funds that outperformed in one period later underperform in the next.
Lesson #3: The More You Watch, the More Drama You Can Expect
Watching March Madness can be a thrilling experience that can evoke intense emotions, akin to watching a clock tick slowly while waiting for a significant event. Despite being highly entertaining, the NCAA tournament is undeniably dramatic.
On the other hand, closely monitoring the market is rarely helpful or enjoyable. The more you observe the markets, the more susceptible you may be to making unwise investment decisions. Successful investors detach themselves as much as possible from the regular fluctuations of stocks.
Lesson #4: Leave Emotions out of the Decision-Making Process
As humans, we are inclined to observe patterns in our daily lives, and our tendency to remember when these patterns "work" only reinforces our pattern-seeking behavior.1 For instance, selecting your alma mater or a nearby school to advance in the season beyond what probability and evidence suggest is a prime example.
When making investment decisions, it's advisable to prioritize evidence-based investment theories and research, rather than basing your judgments on insignificant indicators, patterns, or intuition. Quality decision-making processes should safeguard us against our internal hardwiring that causes us to misinterpret probabilities, perceive patterns where there are none, and exhibit emotional responses.
Lesson #5: Keep in Mind the Importance of a Great Coach
Undoubtedly, a skilled coach can significantly influence the success or failure of a team, whether it is sports-related or otherwise. Coaches can serve as primary motivators and provide a calming presence when emotions run high. Similarly, when it comes to financial well-being, partnering with a trusted and knowledgeable financial advisor can be advantageous. Having a good behavioral coach is critical to maintaining emotional stability and clarity as you make financial decisions.
Financial advisors often serve as emotional buffers between individuals chasing returns and those fleeing emotionally charged markets. Without proper guidance, you may lack the knowledge and self-control required to approach investments prudently. While we can draw parallels between the two, creating a March Madness bracket doesn't carry the same high stakes as building an investment portfolio. Therefore, it's essential to connect with a trusted advisor before diving into the season.