March Madness was scheduled to begin yesterday but as everyone is already aware, March Madness has been canceled. As the timing might not be as relevant, I believe the information is still helpful. With the markets where they are today, it is more important than ever to make sure you are working with the right advisor.
With that being said, as many of us know, March Madness is often full of upsets, underdogs and blowouts. Like investing, filling out a bracket involves balancing risk, reward and expectations, and winning a pool ultimately requires a bit of luck along the way. Here are a few lessons from March Madness that we can apply to the world of investing.
Lesson #1: Forget Perfection, Position Yourself Strategically
The odds of filling out the perfect bracket are scarce - so are the odds of consistently selecting prime investments within the market. This can make the process of approaching March Madness, and investing, daunting.
Successful investing stems from focusing on what you can control. That can mean building a portfolio that is positioned to maintain return premiums, such as size, value or profitability that can improve risk-adjusted returns. Additional areas that are also within your control include asset allocation, keeping investment costs low, minimizing taxes and more.
Lesson #2: Don’t Let Past Performance Dictate Future Decisions
Similar to allowing a past team’s success influence your bracket picks, investing based on previous performances will generally only lead to disappointment. As an investor, you should never assume that your “best pick” in the past or even from the most recent year would act similarly in the near future.
It is also important to keep in mind that luck can often play a role in the success of one’s season. While your bracket pool, or asset managers might be skilled, it’s hard to always tell if it’s that skill or luck that helped them do so well. It is common to see funds that have outperformed in a certain amount of time proceed to under perform in the following period.
Lesson #3: The More You Watch, the More Drama You Can Expect
Just like watching a clock tick slowly as you wait for a profound moment or event to take place, the more you watch March Madness, the more attached and emotional you often become about the outcomes. While highly entertaining, the drama associated with the NCAA tournament is undeniable.
Keeping a close eye on the market is almost never helpful or entertaining. In fact, the more you watch the markets, the more susceptible you may become to making poor investment decisions. Great investors detach themselves as much as possible from regular stock fluctuations.
Lesson #4: Leave Emotions out of the Decision-Making Process
As humans, we see patterns in everyday life and our tendency to maintain memories of the times they “work” only enhances that pattern-seeking behavior.1 A great example is choosing your Alma mater or a nearby school to advance in the season further than what evidence and probability suggest.
When it comes to making investment decisions, it is wise to emphasize evidence-based investment theory and research as opposed to basing your judgments on minor indicators, patterns or gut feelings. Quality decision-making processes should ultimately protect us from our internal hard-wiring that causes us to ignore, or at the very least, misinterpret probabilities, discover patterns where none exist and exhibit emotional responses.
Lesson #5: Keep in Mind the Importance of a Great Coach
There is no denying that a great coach contributes greatly to the success or failures of a team, sports-related or otherwise. Coaches can act as key motivators and can be calming in times when emotions run high. In terms of financial well-being, working with a trusted, educated financial professional can be beneficial. Having a good behavioral coach is crucial to maintaining emotional stability and clarity as you make financial decisions.
Financial advisors often act as emotional barriers between individuals chasing returns and running from emotionally charged markets. Without proper guidance, you may lack the understanding and discipline to approach investments wisely. While we can certainly compare the two, creating a March Madness bracket does not have the same high stakes as developing an investment portfolio. Be sure to get in touch with a trustworthy advisor before jumping into the season.
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