It’s that time of year again…the most exciting month in college sports for basketball fans- March Madness! As we know, March Madness is always a wild ride with upsets, underdogs, and blowouts. With that in mind, here's four lessons from March Madness that apply to the world of investing.
1. THE “EXPERTS” ARE CLUELESS
The odds of filling out the perfect bracket are 1 in 9 quintillion. Yet, we still tune into ESPN and all the other sports commentators to hear their picks as if they have the answers. However, their picks are no better than a coin flip. In the world of investing, often, such forecasting by so-called "gurus" are typically just a marketing technique to reel you in. While predicting the winners in March Madness is impossible, so is being able to predict the direction of the market. The reality is we all know that there will be upsets (or market corrections). We just don’t know when they will happen.
2. THE DRAMA GOES UP THE MORE YOU WATCH
The more you watch the NCAA tournament, the more emotional you become about the outcomes. Watching the drama of March Madness is a great form of entertainment, but watching the stock market closely can make you more susceptible to making poor investment decisions. This is known among behavior finance experts as ‘Myopic loss aversion’. If an investor checks their investment portfolio daily, they have a greater chance of seeing a loss. Given that investors feel the pain of losses far greater than they feel the pleasure of gains, they are more likely to stress out and feel compelled to tinker with their investment strategy or even worst, panic and sell everything.
3. EMOTIONS SHOULD BE LEFT OUT OF THE DECISION-MAKING PROCESS
When it comes to filling out your bracket, it’s always tempting to choose your alma mater or the local fan favorite to advance further than what evidence and probability might suggest. I know I'm definitely guilty of this with my KU Jayhawks! A good rule of thumb for both filling out your brackets as well as investing is to avoid making emotionally driven choices. We might want our emotions to be right and help us choose wisely, but when it comes to investing, making decisions based on fear, greed, anxiety, or even hopefulness can sometimes do more harm.
4. DON'T FORGET THE IMPORTANCE OF A GREAT COACH
In basketball, and in sports in general, the coach is a crucial member of the team. Coaches can motivate players and can be a calming influence when emotions run high, helping their team stay on track. One of the most valuable benefits clients have in working with a CERTIFIED FINANCIAL PLANNER™ professional is having a good behavioral coach. We act as an emotional circuit breaker circumventing clients’ tendencies to chase returns or run for cover in emotionally charged markets. Left alone, investors often lack both understanding and discipline, allowing themselves to be swayed by headlines and advertisements. Matter of fact, this Barron’s article cites several studies that found that over long periods, behavioral coaching can provide 1.50% of added value to a client’s portfolio.
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About the Author:
Desmond Henry is a fee-only CERTIFIED FINANCIAL PLANNER™ professional and founder of Afflora Financial Life Planning in Topeka, Kansas. He helps the retiring/retired plan their finances and invest their money. CLICK HERE to learn more.