By Dan Miller, CFP®
March Madness is upon us, and I wish I was just talking college basketball! With everything happening in the world today – Madness may be a great way to describe our current geopolitical climate.
But instead of dwelling on our world situation, I want to highlight and compare the favorite time of year for college basketball fans, the NCAA Tournament, to the world of investing and financial planning! Financial planning and investing, like filling out a bracket, involves balancing risk, reward, and expectations. And winning that office pool may also require a bit of luck along the way! So here are a few lessons from March Madness that I believe we can apply to the world of financial planning and investments.
Lesson #1: Forget Perfection, Position Yourself Strategically
The odds of filling out the perfect bracket are pretty scarce – and so are the odds of always selecting the best investments within the market. Therefore, this can make the process of approaching March Madness, and investing, fairly daunting.
We believe that financial planning and successful investing stems from focusing on what you can control and limiting the effects of the things you can't. That may mean many things. Things such as building a portfolio that is built around your financial plan. Portfolio size, liquidity needs and asset types all must be considered. Additional areas that are also within your control may 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 team’s past win-loss record influence your bracket picks, investing based on previous performances may lead to disappointment. As an investor, you should never assume that your “best pick” from the past will act similarly in the 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 may be hard to tell if it’s that skill or luck that helped them do so well. It’s fairly common to see funds that may have outperformed in a certain time period 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 may become about the outcome. While highly entertaining, the drama associated with the NCAA tournament is undeniable.
Studies have shown that the more investors intensely watch the market and become emotionally attached to each ticker movement, the more susceptible they may become to making poor investment decisions. Great investors often 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. Otherwise know as the "bias of the familiar."
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, familiarity, or gut feelings. Quality decision-making processes should ultimately protect us from our internal hardwiring that causes us to misinterpret probabilities and to discover patterns where none truly exist.
Lesson #5: Keep in Mind the Importance of a Great Coach
There’s no denying that a great coach contributes greatly to the success or failures of a team, sports-related or otherwise. Coaches can act as key motivators and can also be calming when emotions run high. (Unless you are Bobby Knight – You might just throw a chair! 😊) In terms of financial well-being and coaching, working with a trusted, educated financial professional can be very beneficial. Having a good 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, many investors and potential retirees lack the understanding and discipline to approach their investments and their financial planning wisely. While we can certainly compare the two, creating a March Madness bracket doesn’t have the same high stakes as developing a financial plan or investment portfolio. Please be sure to get in touch with a trustworthy advisor before jumping into the game.
Daniel S. Miller, CFP® is President of Miller Financial Group, Inc. with offices located in Red Oak, IA and Omaha, NE. Dan and his team serve clients throughout the country as they prepare for the next stages of their financial lives. Dan is a published author of the book “Retirement Built to Last: Planning for When the Paychecks Stop” and has had articles published in the Wall Street Journal, Financial Advisors IQ, Successful Farming and The Hill. He is also a dedicated husband, father, and advocate for the financial planning process and financial education.