Marching Away from the Madness

It’s that time of year – spring is around the corner, and spirits are high with anticipation of watching the top teams battle it out in the NCAA March Madness Tournament in a few short weeks. Whether you are an avid basketball fan, or just enjoy listening to the many theories around who will win, you’ve likely heard of the event. Sixty-eight teams play in a single elimination tournament that lasts three weeks in an attempt to win the men’s Division I Championship. Another aspect of the tournament is the creation of brackets where individuals try to guess which teams will continue to win through the Sweet Sixteen, Elite Eight, Final Four and all the way to the Championship game. You’re probably wondering, “What on earth does March Madness have to do with finance?” All of this excitement around picking the “right” teams may seem like harmless gambling, but what about when you are watching the stock market trying to pick the “right” stocks that will keep “winning,” or increasing in value, for your investment portfolio? These tendencies to choose an investment, because you are familiar with the company or prefer their product(s), are types of behavioral biases.

Behavioral biases are beliefs or behaviors that can unconsciously influence our financial decision-making. One example is loss aversion, where the pain of losing (money) is more powerful than the pleasure of gaining. This is why many investors panic and sell investments when a single stock declines, but are disappointed in a 4% portfolio gain because it’s “below average.” Most of what behavioral biases are boil down to emotions and not looking at the big picture. It’s easy in today’s world to focus on the immediate and now, but taking a step back to make decisions based on long-term goals is what can give you peace of mind. Would you stop rooting for your favorite basketball team because they lose one regular season game? Probably not. Would you pick all the same teams that made it to the Final Four last year? I doubt it. What worked in the past won’t necessarily work again. This also applies to choosing investments that did well in a previous year; it does not predict future performance. Would you place all of your retirement savings into a single investment? Hopefully not! Your long-term goals might look different from your neighbor’s, friend’s and even family member’s, but the process to determine those goals is quite similar.

What does this process look like? Consider doing the following: Determine when you want your retirement to start – do you want to retire at 50, or 65? Calculate how much you need to save to live your ideal lifestyle – do you plan to spend $70,000 a year, or $300,000? Invest your portfolio, while avoiding taking unnecessary risks – should you invest in a 60% equity portfolio, or an 80% equity portfolio? These topics are a small sampling of what we talk to our clients about when creating their personalized wealth management plan. In many ways, advisors can serve as a financial “coach,” to leave the emotions on the sidelines when volatility returns to the market. You want the same values in a coach on the court that you have for your finances – educated, strategic, and trustworthy.

Though not a comprehensive list of the steps necessary to prepare yourself successfully for 20 to 40 years of life, post-career, it’s a great starting point. And while it’s highly unlikely for someone to fill out a perfect bracket (more specifically, 1 in 120.2 billion), you can sleep soundly knowing you’re on track for your goals. Not every year in the market will be championship worthy, but having a financial coach and a well-thought out financial plan will ensure you can stay in the game for the long-term.