Bill McManus | Wed Mar 30 14:30:00 EDT 2016
The NCAA college basketball championship tournament—March Madness—is one of my favorite sporting events of the year. The raw emotion that each game evokes is unparalleled as sixty-eight teams hit the hardwood, fighting for their dream to be the one team that emerges as the national champion in the end. The jubilation and simultaneous agony at the end of each 40 minute contest is palpable to any viewer just by looking at the faces of the players on each team. That emotion easily transfers over to us as fans as we each have some type of interest in each match-up, whether we are rooting on our alma maters or favorite teams, or are just hoping to beat our co-workers and friends in a bracket contest.
The 2016 tournament has been a wild ride, rife with upsets, underdogs and blowouts. My bracket, like many other people’s, got busted early on, despite my efforts to make careful, informed predictions. Thinking about the methods I used for filling out a March Madness bracket, it made me realize that many of the tried and tested tactics for filling out a bracket could actually translate to our investing lives—and making the comparison could also be a creative way for financial advisors to impart some important guidance to their sports-minded clients.
Here are a few parallels between March Madness and investing that I have noticed:
Upsets are always possible, if not probable.
Even if you put in your due diligence, crunch numbers, perform research and track analytics, the only real “sure thing” we can rely on is unpredictability. Sometimes a no. 10-seed team reaches the Final Four, and sometimes highly rated funds underperform. In investing, as in sports, there are ups and downs that cannot necessarily be expected based on past performance—volatility is ubiquitous. Try as we might to avoid it, disappointing upsets that mess with our brackets are bound to happen at some point, which leads me to my next point . . .
Emotions should be left out of the decision-making process.
A generally good rule of thumb in both sports and investing is to avoid making emotionally driven choices. While it might be tempting to choose your alma mater or local team to win it all, that kind of thinking is not realistic. We might want our emotions to be right and help us choose wisely, but when it comes to investing, making decisions based on fear, anxiety or even hopefulness can sometimes do more harm. Relying on our guts to steer us just might make the upset factor more of a likelihood.
Perfection is impossible.
The odds of picking a perfect bracket are vastly enormous—math professors around the country have put the odds at 1 in 9.2 quintillion (that's 9.2 followed by 18 zeros).1 The same can be said about an investment portfolio. No matter how hard we try or how much we watch the scores, we can’t make every right choice, every time, and we can’t safeguard our investments definitively. Rather than trying to be perfect and win every time, having a larger share of the winners is the key to long-term success. All we can do is make the best choices we can with the information we have. Everything else is out of our hands.
One final note to remember is that in basketball, and in sports in general, the coach is a key member of the team. The coaches exist to design strategies, determine tactics, monitor progress and make adjustments—all with the intention of reaching that goal of being the last team standing. Coaches can motivate players and can be a calming influence when emotions run high, helping their team stay on track. To me, that sounds a lot like the role of the financial advisor, so remember to be that voice of reason for clients, coaching them and leading them in the direction of their goals, and weathering with them all of the inevitable ups and downs.
1 Source: http://www.ncaa.com/news/basketball-men/bracket-beat/2016-03-14/march-madness-7-things-more-likely-happen-picking