The buzzer beaters. The Cinderella stories. The great individual performances and the fantastic team efforts.
The thrill of winning your office pool. In short: It's March Madness. If you're like millions of other Americans, you've been glued to the television-or the computer in your office-the past couple of weeks feasting on college basketball.
As we prepare to learn which four schools will punch their tickets to Arizona for the Final Four this weekend, it got us reflecting on the myriad of similarities between this great tournament and the art of financial planning. With that in mind, here are the three lessons you can learn while enjoying the thrills of March Madness.
No one can predict what's going to happen during the tournament
After the bracket is initially released, countless analysts offered their predictions as to how the tournament will unfold. Yet no matter how much or how little of a college basketball expert you may be, it's practically impossible for anyone to predict the tournament with complete accuracy.
ADVERTISEMENT
The same holds true when investing. There are a lot of analysts who will try to make short-term predictions about the stock market, but ultimately these predictions are guesses. They may be well-educated guesses, but they're guesses nonetheless. The reason is that the markets are inherently unpredictable over the short term. That's why when you invest in more volatile assets like stocks, your time horizon should be long enough where you can ride out any unpredicted short-term volatility.
Upsets happen, but good teams tend to reach the Final Four
Following up on our first lesson, the reason that no one can really predict what's going to happen in the tournament is that upsets-sometimes remarkably stunning upsets-happen all the time. Think back over the past several years, and you can remember 14- and 15-seeds pulling off stunning upsets over some of the goliaths of college basketball. Yet if you look at champion teams since 1985, 60 percent have been 1-seeds and 88 percent of champions have been a 1-, 2- or 3-seed.
In other words, there's usually quite a bit of volatility early in the tournament, but over the long-term, the better teams win. When thinking about investing, there may be rocky periods in the short term, but over the long term, we believe that diversified portfolios are likely to win out by providing you greater risk-adjusted returns than non-diversified portfolios. That said, being diversified doesn't guarantee you'll see gains in a given year, just as predicting a top seed doesn't mean you'll win your office pool in a given year, but it can increase the chances of success.
Winning teams usually need to be good at doing everything
The best college basketball teams generally don't excel at only one facet of the game. After all, if they put all of their eggs into one basket, and they performed poorly at that one facet of the game, their dreams of a Final Four run likely wouldn't come to fruition.
Instead, the successful teams-and successful investors-tend to do well at everything. Good teams are able to make 3-points, a riskier shot that provides more points, just like investing in stocks. Good teams likely play good defense, which relates to having enough cash and cash equivalents in an emergency fund. Finally, good teams probably have good free throw shooters providing a steady source of scoring, which relates to having some bonds and other fixed income instruments that can provide a reliable stream of income.
And when you watch a team that's committing a lot of turnovers, it can result in trouble on the court. Similarly, if you're committing turnovers in your financial plan by ignoring tax planning, lacking a diversified portfolio or going without an estate plan, you're unnecessarily handicapping yourself.
ADVERTISEMENT
It's been said that the odds of a perfect March Madness bracket is 1 in 9.2 quintillion. Fortunately, the odds of financial success are significantly better when paired with a comprehensive financial plan. Reflecting on these lessons and working with a good financial advisor to implement your plan is, we think, a slam dunk decision. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Bruce Helmer and Peg Webb are financial advisers at Wealth Enhancement Group and co-hosts of "Your Money" on KLKS 100.1 FM on Sunday mornings. Email Bruce and Peg at yourmoney@wealthenhancement.com . Securities offered through LPL Financial, member FINRA/SIPC. Advisory services offered through Wealth Enhancement Advisory Services LLC, a registered investment adviser. Wealth Enhancement Group and Wealth Enhancement Advisory Services are separate entities from LPL Financial.
