Investing Lessons From March Madness

Don't pick too many "bracket busters"

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David B. Armstrong

This is such a great time of the year. For starters, it’s the time of year that St. Patrick’s Day rolls around and everything turns green for a day.  It’s the only time of the year that I can get away with wearing green socks without a sideways look.

In addition to the green of St. Paddy’s Day, we have a nicely green stock market for the year, too. In fact, with a return of 11.65 percent on the S&P 500 through St. Patrick’s Day, it is the best start of a year up to this day since 1991 when the S&P 500 was up 13.13 percent. Remember Desert Storm!?

But the real exciting thing that goes on this time of the year has little to do with St. Patrick’s Day or the stock market.

The real excitement is March Madness!

Starting last week, the field of 64 teams plays to see who is the NCAA Champion.  Everyone knows what a bracket looks like and how each of the four divisions is “seeded” from the one seed all the way down to the sixteen seed.  This seeding started in 1979 and was an effort to make sure that the best teams did not meet each other until later in the tournament. Good business, actually—especially for TV and advertisers.

Every office is abuzz with picks, brackets, and attempts to predict the “spoilers” or the upsets. Even those who do not follow a single game all year get in on the action (all for fun and the thrill of the win in corporate offices, right?).

Even the biggest amateur knows it’s not a good pick to select a number sixteen seed to beat a number one seed. In fact, there has never been a number sixteen team that beat a number one team in the history of the tournament. The number one seeds usually have better players, better coaches, and better facilities at their schools than the number sixteen seeds. Given that, it’s been a bad bet to select a number sixteen to beat a number one. I’m not saying it will never happen; I’m just saying that it’s not a good bet.

However, every year, some low-seeded team pulls off an upset. These teams are called “bracket busters.” Last year, a number eleven seed made it all the way to the Final Four. Over the course of the past 27 years, there are a decent amount of number twelve seeds that beat number five seeds, but over the long run, the number five seeds win more than 50 percent of their games, while the number twelve seeds win only about 34 percent of their games.

Even when knowing these stats, everyone seems to spend all of their time looking for the upsets. Flip on any sports TV station and they are all talking about the “bracket busters.” The upsets.

What people should be looking at are the teams that have the best chance of winning the whole championship—looking at the teams that are most highly seeded, because they have the best chance of winning it all.

The same goes for investing. It’s always fun to try to pick the long shot. People always feels so smart when they pick the dark horse investment, but they lose sight of how important it is to pick the winners that will go the distance. It’s the investments that have the best chance of winning over the long haul that will provide investors with the greatest probability of success over the long term.

I’m not saying that investors should not pick a few investments from time to time that are long shots, but that risk must be controlled.

Having a financial plan that focuses on the long term is the first step. Having an asset allocation and investment strategy that corresponds to the financial plan is essential as well. These are your top-seeded teams.

If after you have your financial plan and investment strategy fully implemented and funded, you find that you have some surplus money, go ahead and pick some long shots. But keep in mind that overconfidence is one of the most destructive forces an individual investor can fall victim to.

David B. Armstrong, CFA, is a managing director and cofounder of Monument Wealth Management, a full-service wealth management firm in Alexandria, Va. Monument Wealth Management is backed by LPL Financial, an independent broker-dealer and Registered Investment Advisor. David has been named one of America's Top 100 Financial Advisors for two straight years by Registered Rep Magazine (2009 and 2010, based on assets under management) and has been interviewed by several national media sources over the past several years. Follow David and Monument Wealth Management on their blog Off The Wall, on Twitter at @MonumentWealth and @DavidBArmstrong, and on their Facebook page. Securities and financial planning offered through LPL Financial, Member FINRA/SIPC.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for any individual. All performance references are historical and are not a guarantee of future results.