Don’t Invest your portfolio like you pick your NCAA bracket.

I love tournament season. It is hard to match the drama and intensity of 32 basketball games in 2 days and another 16 over the weekend. A last-second shot can catapult your team to the Sweet 16. Miss it, and the season is over.

Not only does every game matter to the fans, but it also matters to every person who filled out a bracket. The results are difficult to predict. Basketball junkies see their brackets busted by upsets. Sefl-described non-fans who pick based on uniform color or mascot can win it all.*

Don’t Invest your portfolio like you pick your NCAA bracket.

Some people approach investing the same way they approach the tournament. They try to pick the big winner or focus on trying to beat other investors. Others make the opposite, far less costly, mistake of choosing their NCAA portfolio like an investment portfolio. Understanding the differences between the two can help your portfolio perform better and prevent you from picking an unwinnable bracket.

1. NCAA tournament brackets are zero-sum games. You either picked the right team, or you didn’t. You only earn a prize when doing far better than average. Investing doesn’t require picking the winners; you can pick the whole market and still profit. Even after a difficult 2022, the S&P 500 has increased 12.5% per year over the last ten years. You may miss out on the fund that did the best, but investing in the broad market has produced handsome rewards.

2. In an NCAA tournament contest, many pools offer prizes for the top three brackets. This means there is no difference between fourth, fortieth, and eighty-fourth place. If you’ve finished in the second five in a 100-person pool each of the last five years, you are excellent at picking basketball games and have nothing to show. An investor who beats 90-95% of all other investors for five straight years might be fielding calls from Warren Buffet to join his team.

You can always recover from a busted portfolio, not a busted bracket.

3. Pick the champion that maximizes your chances of winning the bracket, not the team you expect to win. The reason non-fans win is that they are often the only people who picked some upsets or a surprise winner. The basketball experts flock to specific teams to win the championship. Often, they must choose the winner, the runner-up, and potentially the whole final four to win. That’s tough. Investors don’t have to worry as much about how others are investing. Instead, take the right amount of risk and use the suitable types of investments to meet your goals.

You can always recover from a busted portfolio, not a busted bracket.

 

Scott Kubie, CFA
President

*I am not in favor of gambling, yet I miss the fun of brackets. One option is to influence your employer to sponsor a contest with no entry fee and prizes. If that doesn’t work, I am willing to pay a modest entry fee as a cost for fun. If I win, I spend the winnings on a little celebration or give the winnings away. Happy picking and prudent investing.