March Madness has just begun, 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 managing expectations. Here are a few lessons from March Madness that can be applied to the world of investing.
Forget Perfection, Position Yourself Strategically
The odds of filling out the perfect bracket are low (less than 1 in 9 quintillion). So are the odds of consistently selecting top investments in the market. This can make the process of approaching March Madness, and investing, daunting.
Successful investing comes from focusing on what you can control. This means developing a thoughtful plan and acting continuously on the plan as opposed to acting/reacting to the “news.” Your plan should outline your strategy for the things you can control, such as managing your tax brackets, your investment allocation, and your behavior during rocky markets.
Don’t Let Past Performance Dictate Future Decisions
Like allowing a team’s past success to influence your bracket picks, investing based on previous performance can lead to disappointment. As an investor, you should never assume that the “best pick” from the past will perform as well in the future.
It’s also important to keep in mind that good fortune can often play a role in the success of one’s season. While a team or a stock might have had a good run, it may be hard to tell if it was skill or luck that helped them do so well. It’s fairly common to see stocks that have outperformed during one period to underperform in the next.
The More You Watch, the More Drama You Can Expect
The more you watch March Madness, the more attached and emotional you may become about the outcomes. While highly entertaining, the drama associated with the NCAA tournament is undeniable.
Keeping that close of an eye on the market is almost never helpful or entertaining. In fact, the more one watches every little twitch in the markets, the more susceptible they may become to making poor investment decisions. Successful investors detach themselves from regular stock fluctuations.
Leave Emotions out of the Decision-Making Process
As humans, we see patterns in everyday life and our tendency to remember the times they “work” only enhances that pattern-seeking behavior. 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 strategies, as opposed to basing your judgments on patterns or gut feelings. Thoughtful decision-making processes should ultimately protect us from our internal hardwiring that causes us to misinterpret probabilities, discover patterns where none exist, and exhibit emotional responses.
Remember the Importance of a Great Coach
There’s no denying that a coach contributes to the success or failure of a team. Great 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 professional can be beneficial. Having a good financial coach is crucial to maintaining stability and clarity as you make financial decisions.
Though creating a March Madness bracket typically doesn’t have the same high stakes as developing an investment portfolio to support you during retirement, it is still interesting to see some of the strategic comparisons. As always, be sure to contact an HCM Wealth Advisor if you would like to discuss your Wealth Plan.
| Steve Hengehold CFP® RICP®|
Steve has been with HCM since 2014. He is dedicated to helping people understand their necessary commitments and moving them towards their goals. He loves helping clients to focus on their passions. When not at work, Steve enjoys playing guitar, reading, deferring taxes, compounding investment returns, fishing and SCUBA diving.