As March Madness approaches, college basketball fans eagerly anticipate the upsets, underdogs, and blowouts that make the tournament so thrilling. Similarly, investing involves balancing risk, reward, and expectations, and success often requires a bit of luck. Here are five lessons from March Madness that can be applied to your investment portfolio.
Lesson #1: Focus on Strategic Positioning, Not Perfection
Just as the odds of filling out a perfect bracket are slim, consistently selecting prime investments is difficult. To succeed, investors should focus on what they can control, such as your asset allocation, diversification, and minimizing investment costs and taxes. Remember, you should almost always be unhappy with at least some portion of your portfolio.
Lesson #2: Past Performance Is Not Indicative of Future Results
Past team success should not influence your bracket picks and neither should past investment performance influence your future investment decisions. Picked a winning bracket last year or timed your last investment perfectly? Is it luck or skill or some some combination of both? It can be hard to tell and all too often people jump at the chance to get on TV/TikTok/YouTube to claim the later. If you chase past performance, be prepared for disappointment.
Lesson #3: Keep Watching if You're Looking For Drama
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.
Looking at your portfolio too often 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. The best investors detach themselves as much as possible from regular stock fluctuations and focus on their investment process.
Lesson #4: Check Your Emotions at the Door
We humans have a tendency to see patterns in everyday life and make decisions based on gut feelings. Behavioral Finance is all about understanding how our human emotions affect our decision making. Loss and Envy (fear and greed) are powerful influencers on people's decision making. As Warren Buffet said "We don't have to be smarter than the rest. We have to be more disciplined than the rest." Quality investment decision-making should be based on evidence and research to avoid misinterpreting probabilities and exhibiting emotional responses. Should you really have your alma mater or your favorite school in the final four?
Lesson #5: The X Factor: A Great Coach
A great coach contributes to the success or failure of a team, and a trusted financial advisor can be invaluable in helping you maintain emotional stability and clarity when making financial decisions. Without proper guidance, investors may lack the understanding and discipline needed to approach investments wisely.
Investors can learn a lot from the lessons of March Madness, including the importance of strategic positioning, the role of luck vs. skill, watchout for drama, be aware of your emotions, and do yourself a favor and work with a trusted financial advisor.
This content is developed from sources believed to be providing accurate information, and provided by Wrought Advisors. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.