It happens every March: In fits of madness, America falls in love with small colleges from around the country, as their basketball teams somehow pull off miraculous upsets. (This year, it was colleges like Middle Tennessee State, Stephen F. Austin, Hawaii and Little Rock who came out victorious in the initial rounds.)
Americans love Cinderella stories—whether it’s in basketball or investing. After all, betting on a come-from-behind team that goes all the way or a hot stock that’s on a tear could mean bragging rights and big money in your pocket.
If you care about your March Madness bracket, you probably spent the days leading up to the tournament chatting with friends, reading blogs and researching hot tips that could make you a winner—just like plenty of people do when putting together their portfolios.
An exciting strategy, sure, but is it a smart one? Here’s what March Madness can teach us about emotional investing, timing the markets—and the one strategy that pays off in the long run.
1. It’s easy (but risky) to get caught up in the hype.
Sure, hyped-up teams—like stocks—can have meteoric runs. But just as often, they fizzle out almost as quickly as they ascended.
When the dust cleared after the 2016 tournament’s first weekend, all the Middle Tennessee States and Stephen F. Austins were gone, and the Sweet 16 included nary an unexpected name. Now that the Final Four is set, we have Villanova, Syracuse, North Carolina and Oklahoma—none of which rode a souped-up pumpkin to the dance.
For every Google or Apple or, better yet, solid index fund you add to your portfolio, there are hundreds, even thousands, of stocks like GoPro—which, despite a strong IPO and first several months of trading, took a nosedive and has dropped more than 85 percent since its all-time-high price.
In basketball and on Wall Street, you’ll get where you want to go by picking teams with a good foundation—a history of beating the competition year after year and leaders who repeatedly demonstrate they can make adjustments and remain on top, even when times change—not by chasing hot tips. An easy, fee-friendly way to do this in the market is through mutual funds and ETFs, which allow you to invest in a basket of stocks and/or bonds and can help you avoid being dragged down by a few poor performers.
2. Luck is often confused with skill.
Of course, stock (and basketball underdog) pickers do win a round every so often. And they love to go on TV and brag about their skill at finding diamonds in the rough. People remember these dramatic upsets—just like you can probably recall a friend telling you about how they made big money as an active investor.
While memorable, these are statistical anomalies. John Bogle will tell you that the majority of investors aren’t capable of actively managing a portfolio of stocks, nor should they try. (In fact, 86 percent of professional active-fund managers failed to beat their benchmarks in 2014.) And the biggest mistake many inexperienced investors make is buying and selling impulsively—or trying to time the markets.
Instead, building a sound portfolio and sticking with it—ignoring the trend or Cinderella of the day—is the key to long-term investing success for most.
3. Even winners have down days.
Even though blue chips like Duke suffer shocking upsets from time to time—to Lehigh in 2012, Mercer in 2014—the Blue Devils have won the tournament three times since 2001, securing bracket winnings and office bragging rights for fans who stuck with their team. Those who jumped off the Duke bandwagon because of those upsets lost big in the long run—which is exactly what happens to investors who overreact when the stock market hits its occasional turbulence.
Decades of data show that stocks are a winning investment over time. On the other hand, investors who make short-term decisions can and do lose money: People who sold during the 2008 recession lost half the money they invested just a few years earlier, but those who rode out the tough times have seen their money double.
Bottom line? Keep your head (and money) in the game.
March 29, 2016