If you ask me, the NCAA Basketball Tournament and its corresponding March Madness is one of the most magical times of the year. 68 teams line up to make a stand for a national championship and, in just under a month, a new champion is crowned. In the meantime, there are Cinderellas and Goliaths writing their own story lines, and if you think about it, there are quite a few lessons for investors.
Hot Streaks & Upsets are Hard to Predict
In basketball, just about any team can win on any given day. Sure, the better teams are likely to win more often, but upsets are a part of March Madness that basketball fans anticipate and relish. In the same way, as an investor, there's no such thing as a sure thing. In basketball, upsets are often a triumphant moment unless it’s your team that hits the skids. In investing, putting too much of your money in one particular area, especially one that has been on a hot streak, can be truly harmful with too much risk concentrated in a place that feels safe.
There is no “I” in Team
Success stories in the basketball tournament are built on teamwork and a heady game plan from the coach. Sure, individual heroics are rewarded on highlight reels and around the water cooler, but to make a run deep into the tournament it takes a team. Likewise for investors, a singular star investment is not all you need for success. Careful construction of a diversified portfolio (often with the assistance of an investment professional) helps to manage risk and plan for a variety of market environments.
Recognize the Home Team Bias
There will be 67 teams who will go home disappointed from the basketball tournament. That doesn't mean that their fans aren't dreaming of a shining moment for their team. While dreams of a championship are integral to the excitement and hype of March Madness, they also offer a great human experiment on human biases. For example, if you live in Michigan, check your office pool to see how many people predicted that Michigan State or Michigan might win it all? The percentage is probably higher than the national average. That is because of local favoritism or location bias. Enjoy the moment as you construct your bracket, but take this lesson with you as you think about investing. These types of biases carry over to investors and can be typified by higher percentages of their own company stock or more likelihood to invest in something they're more familiar with regardless of fundamental merits.
So, this year, while you’re carefully filling out your bracket, cheering on your favorite teams, and celebrating your solid picks, take a breather and reflect on your own investments. Need help hitting your goal? Feel free to call me for help laying out a personal game plan (and even to compare brackets).
Melissa Joy, CFP®is Partner and Director of Investments at Center for Financial Planning, Inc. In 2011 and 2012, Melissa was honored by Financial Advisor magazine in the inaugural Research All Star List. In addition to her frequent contributions to Money Centered blogs, she writes frequent investment updates at The Center and is regularly quoted in national media publications including The Chicago Tribune, Investment News, and Morningstar Advisor.
Financial Advisor magazine's inaugural Research All Star List is based on job function of the person evaluated, fund selections and evaluation process used, study of rejected fund examples, and evaluation of challenges faced in the job and actions taken to overcome those challenges. Evaluations are independently conducted by Financial Advisor Magazine.
Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Diversification does not ensure profit or guarantee against a loss. Prior to making an investment decision, please consult with your financial advisor about your individual situation.