Hoop Dreaming Is Fun During March Madness. Investing Realities Apply Across A Lifetime.

Every year at this time, NCAA March Madness thrills fans and creates so much interest that an estimated one in four Americans filled out a bracket to try to predict who will win it all. (1) I really enjoy watching the games and always fill out a bracket in a pool with my family. This year, I could not help but see connections between investing and March Madness.

Let's start with the similarities.

  • Maybe your NCAA championship bracket picks are as wrong as mine, but do not feel bad. The odds of correctly predicting the winner of all 63 tournament games are astronomically high. (2)
  • In the stock market, most professional investors do not beat the market in a typical year.

An informed approach improves your odds.

  • If you want to do well with your bracket next year, what should you do? The tournament selection committee seeds teams from 1 to 16 in four regions. Always pick the higher-seeded team, and you will have a good chance of winning more games than most. It does not mean you are going to be the champion of your pool, but year after year, you will probably pick more winners than most.
  • With investing, rather than trying to guess winners, you can take an informed approach that relies on decades of academic research, and choose to buy the market. Over the long haul, US stocks have compounded at about 10% a year. (3) Having a plan can help you position yourself to have a better investment experience.

Good luck and good strategy are not the same.

  • Every year, some money manager is going to have the best returns. Every year in each bracket pool, someone wins. But in both cases, it is unlikely that they will continue to come out on top year after year.
  • When people say, “Look at all the money I made on this stock,” I feel it is the same as when someone says, “I picked Fairleigh Dickinson!” Good for you. You got lucky.

How about the differences?

The thrill of participating in a March Madness pool with a lot of people comes from the possibility of winning the pool.

  • My family fills out a bracket each year, and we engrave the name of the winner on a little trophy. And to most people, it is only the winner who matters. I do not even remember who in our family came in second last year.
  • Investing is different. You should have the goal of doing a little bit better than average. Taking unnecessary risks can lead to big losses. As investors, we must remain focused on trying to capture that long-term compounded return of the market, also known as the expected return. That means taking a cautious approach and avoiding the temptation of trying to pick unexpected winners or underdogs.

There is always next year.

  • With the NCAA, there is a new bracket to fill out every year. You get a fresh start.
  • With investing, your results are cumulative. There are no do-overs. There can be pain with investing. Unlike with filling out the brackets, a bad investing outcome last year sticks with you this year and always.

While there are certainly similarities between March Madness and investing, it is crucial to recognize the key differences. When you are picking brackets, sometimes the only way to be the big winner is to take big risks on underdogs, which can be a fun and exciting game to play. With investing, it is better to take a measured and disciplined approach with the goal of pursuing higher expected returns while reducing risk. So enjoy March Madness, but do not confuse the risk of filling out a bracket with the risk of investing in markets.

This post was written by David Booth (Executive Chairman and Founder of Dimensional Fund Advisors). This article was also first distributed by Dimensional Fund Advisors. Shore Point Advisors adheres to a similar investing philosophy to the one that is implemented by Dimensional Fund Advisors, which is the reasoning for the reposting of this article. 

FOOTNOTES

(1) “March Madness Viewership, Bracket Participation Poised for Jump in 2023,” Morning Consult, March 14, 2023.

(2) “The Impossible Allure of the Perfect Bracket,” New York Times, March 12, 2023.

(3) In US dollars. S&P 500 Index annual returns 1926–2022. S&P data © 2023 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.

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