6 Investing Tips You Can Take Away From March Madness
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It's mid-March, which means sports fans around the country are gearing up to stress, cheer and possibly suffer massive disappoint as they closely follow college basketball. Those feelings aren't too different from the ones investors feel all the time.
Sure, betting on basketball teams is very different from investing in stocks and bonds — for one, hopefully you're not relying on the former to fund your retirement. But there are some takeaways from the NCAA tournament that could help make you a better investor, whether you're filling out your first bracket or you've been a longtime college hoops gambler.
"March Madness can teach investors important lessons about the importance of diversification, discipline and staying focused on the fundamentals," says Ashton Lawrence, financial advisor and partner at Goldfinch Wealth Management.
By applying these principles to their investment strategies, investors can increase their chances of long-term success in the stock market, he adds.
What investors can learn from March Madness
Here are six lessons March Madness offers that can help make your investment plan a slam dunk.
1. Don't just pick past winners
Past performance is no guarantee of future results — in basketball or the financial markets.
Asset classes that performed poorly last year could be near the top of the charts this year, while previous years' top picks may be in for a correction or down year, says Christopher Woods, founder of LifePoint Financial Group (and player in the 1993 March Madness tournament when he was at Vanderbilt University).
"There's usually at least one Cinderella story in the tournament every year and the same could hold true with asset classes," Woods says. "So it's best to keep a well-diversified portfolio with appropriate allocations to various asset classes based on your goals, time horizon and risk tolerance and stay invested for the long term to make sure that you don't miss out on this year's winners."
2. Avoid acting on FOMO
Don't give into the fear of missing out.
You will get more consistent, dependable results by looking beyond the currently popular teams with a singular star player and instead choosing experienced teams that have successfully worked under pressure together, says Kassi Fetters, owner of Artica Financial Services. The concept also rings true for investing, which frequently tests our ability to ignore FOMO (think meme stocks and crypto).
"Don’t try to jump on the most current fad or trend in the investing world because there is always something new and exciting out there to be bought," Fetters says. "It is not the norm to become a millionaire by picking that one stock that’s going to boom."
That's the case even if seemingly everyone is talking about it.
3. Avoid "home team bias"
In March Madness, fans often have a bias toward their alma mater or their longtime favorites even if they are not the strongest contender.
A similar phenomenon can happen to investors, says Lawrence of Goldfinch Wealth Management.
"Investors may have a bias towards companies they are familiar with or have a personal connection to," Lawrence says. (This is often referred to as "familiarity bias," and it can be harmful to your portfolio.)
It's important to carefully research investment opportunities, regardless of your personal biases, Lawrence adds.
As Money has previously reported, there are ways to invest in brands you love without overloading your portfolio with them or ignoring risk. One move is to fill holes in your portfolio with sector-focused exchange-traded funds (ETFs), like those that include stocks from companies in the materials or real estate sectors.
4. Diversify
With March Madness, if you want to limit the pain of a busted bracket, you should probably fill out a few brackets with different picks, says Brian Schmehil, managing director of wealth management at The Mather Group. You can keep teams you feel strongly about but perhaps pick different ones across multiple brackets, he adds.
A similar move can help you build wealth via the financial markets.
"With investing, you do not want to put all your eggs in one basket," Schmehil says. Instead, reduce risk by spreading out your investments across different asset classes, companies and sectors.
5. Set goals and act on them
While creating a March Madness bracket, you likely have a goal in mind. Maybe it's to cheer for your alma matter and celebrate wins with your fellow alums, or maybe it's to do a ton of research and win for bragging rights, says Sean Michael Pearson, a financial advisor at Ameriprise Financial Services.
Goal-setting — and acting on those objectives — is an important part of investing as well.
For example, if your investing goals go beyond retiring (like saving for education or a wedding) you may need to invest outside of your retirement account while continuing to make those contributions, Pearson says. That could look like opening a taxable brokerage account.
6. Stay disciplined
Consistently winning during March Madness requires a mix of discipline, focus and luck. Similarly, successful investing requires a long-term view, patience and the ability to stick to a well-defined strategy, even in the face of short-term volatility, Lawrence says.
Doing so entails not letting emotions drive your decisions.
"March Madness can be an emotional rollercoaster, with ups and downs that can lead fans to make irrational decisions," Lawrence says. "Similarly, stock market investing can be emotionally charged, with fear and greed often driving investor behavior."
The best move is likely a well-thought-out investment plan and avoiding reacting to short-term market movements.
How March Madness is different from investing
To be clear, you shouldn't fully approach your investing portfolio in the same way you would betting on a basketball team via March Madness.
As Andy Baxley, senior financial planner at The Planning Center puts it: With March Madness, it's all about coming out on top, which means you have to stand out. That sometimes requires picking unexpected upsets (aka betting on risky teams) that may not pay off. But with investing, it's all about "capturing the power of markets. To do so, you have to blend in and keep costs low," Baxley says.
Plus, sports competitions invoke a lot of emotion, and usually involve various forms of gambling on the results — two factors that you shouldn't bring to your investment strategy, says George Gagliardi, financial advisor and founder of Coromandel Wealth Management.
"I always tell my clients that successful investing practices ought to be boring," Gagliardi adds. "If March Madness was boring, no one would watch it."
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