Wealth Column: Your bracket and the stock market: separating the wrong from the bad
As you fill out your March Madness bracket this year, allow us to be the bearer of two pieces of bad news.
First, betting on your office tournament pool is illegal in the state of Minnesota.
Second, you’re bound to make some wrong picks. Sorry for the doomsday prophecy, but the odds of having a mistake-free bracket are in the neighborhood of 9.2 quintillion to 1. You’re not beating those odds, but that doesn’t mean you’ll pick badly. There’s a difference between making a sound pick that doesn’t work out and making a bad choice.
The same holds true for stocks. Over the course of saving for retirement, you’re going to pick some losers.
Our brackets can help us learn the difference between being wrong and making bad choices with our investments.
Bad choice No. 1: Going with the big names
UCLA is the winningest program in the NCAA men’s tournament history. And if you had picked them to win the championship each of the past 20 seasons, you would have been right zero times.
While financial news networks obsess over the Apples and Amazons of the world, it’s important to remember the goal isn’t to have expensive stock, or a newsworthy portfolio. It’s to have stock that is worth more than the purchase price. Sure, good or bad news can impact a company’s financial outlook, but your goal should be to be invested in a diverse group of companies that are built for the long haul.
Bad choice No. 2: Picking based on past results
In 2018, the 1-seeded University of Virginia lost to the 16-seeded University of Maryland Baltimore County (UMBC) in the most stunning upset in NCAA tournament history. Questions arose about Virginia’s style of play and whether their coach could lead them to a deep tourney run. Maybe they were a team destined for only regular season success.
The Cavaliers won the 2019 championship.
If past results predicted future results, it would be almost impossible to adhere to that most basic of investing principles: Buy low, sell high. If you spend your investment dollars chasing last year’s big gain, you will almost always be buying high, by definition.
Bad choice No. 3: Being too risk-averse
It’s tempting to look at your bracket and simply take the highest seed in each matchup. This reduces the likelihood of making the wrong choice. It’s also a bad way to win an office pool.
The key to investing is not avoiding risk. It is understanding your risk tolerance within the context of your retirement goals. If you embrace a conservative investing strategy too soon, inflation has the potential to cannibalize your savings, and you could miss out on long-term gains for fear of taking on a short-term loss.
Bad choice No. 4: Taking irresponsible risks
Believe it or not, some people actually picked UMBC over Virginia in that fated game. They made the right choice, but it was a bad one.
People often unfairly malign picking stocks as a form of gambling. Speculators who invest in shaky portfolios in the hopes of scoring huge immediate gains only contribute to this perception. Putting money into stock on a lark, or because you received a “hot tip” might be exciting, but it’s a better way to lose your retirement savings than it is to get rich, and you could lose it for good.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.