March Madness is upon us. The season-ending tournament for college basketball is typically full of upsets, underdogs, and buzzer beaters. Like investing, filling out a bracket involves balancing risk, reward, expectations, and strategy. Here are five lessons from March Madness that we can apply to the investing world.
Lesson #1: Forget Perfection, Position Yourself Strategically
The odds of filling out the perfect bracket are incredibly long – approximately one in 9.2 quintillion. So are the odds of consistently selecting prime investments within the market. This can make the process of approaching March Madness, and investing, fairly daunting.
Successful investing stems from focusing on what you can control. That can mean building a portfolio that is positioned based on your financial goals, having an appropriate 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 to 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” from the past will act similarly in the near future.It’s also important to keep in mind that luck can often play a role in the success of one’s season. While your bracket picks, or asset managers, might be skilled, it may be hard to tell if it’s that skill or luck that helped them do so well. It’s fairly common to see funds that have outperformed in a certain amount of time proceed to underperform 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 may become about the outcomes. 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
Choosing your alma mater or a nearby school to advance in the brackets further than what evidence and probability suggest may make you feel good, but is it the best recipe for success?When it comes to making investment decisions, it’s 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 you from our internal hardwiring that causes us to misinterpret probabilities, discover patterns where none exist, and exhibit emotional responses.
Lesson #5: Keep in Mind the Importance of a Great Coach
There’s no denying that coaching contributes greatly to the success or failure of a team. Coaches can act as key motivators and can also 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 doesn’t 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.