About the author: Lamar Watson, CFP®, is a Fee-Only Financial Advisor in the Washington, D.C. area, that works with clients virtually across the country. Lamar's work with his clients focuses on budgeting, employee benefits, paying down debt, buying their first home, and investing. Lamar is the Founder of Dream Financial Planning, a virtual financial planning firm specifically designed to help young professionals and minorities take control of their finances and fulfill their dreams. Feel free to schedule a complimentary consultation to learn how we use the The DREAM Financial Planning Process ™ to help our clients achieve their goals.
March Madness is nearly upon us, and as many of us know, the season highlight for college basketball fans 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 pretty scarce - 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 means 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 will continue to perform well 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 pool, or asset managers, might be skilled, it’s always 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 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 seldom 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’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 us from our internal hardwiring 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’s no denying that a great coach contributes to the success or failure of a team. Coaches can act as critical 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 an excellent 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.
When you work with Dream Financial Planning, we'll craft a customized investment strategy that aligns with your preferred risk tolerance. Our free quiz evaluates several factors, such as your portfolio size, goals, and risk tolerance. In addition to explaining your risk score, the quiz will also provide insight into how to match your allocation with your preferences, as well as the performance you can expect based on the amount of risk you decide to take in your portfolio.
Riskalyze is one tool we use to help better understand our clients' risk tolerance. In addition, we take time to get to know our clients so we can understand their relationship with money and help them prioritize what's most important to make sure their portfolio matches their needs.
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