March Madness and Stocks
Sports metaphors and investing are natural pairs. A good way to look at portfolio management is the NCAA March Madness tournament, reaching its climax this weekend. As with basketball, you need to bet on the top-ranked contestants, but also be flexible since things change.
There are four major brackets in the tournament – East, West, Midwest and South. Think of these like the top-ranked asset classes in the markets, such as domestic stocks, international stocks, fixed income, cash, etc. Within each of these major brackets are the best 16 teams, which represent each of the sectors and sub-sectors in the market, including airlines, utilities, cyclicals, energy and so forth.
When the NCAA ranks the best teams, it’s similar to my ranking all the sectors and sub-sectors in the markets. There is a best, number one seeded team in each bracket, just like there is a worst, number 16-seeded team in each bracket. What I do is rank all these teams (sectors) and pick the strongest few to focus on when investing our clients’ money. If we go one step further – and this only pertains to our stock portfolio – I pick the best players from each of those sectors.
Think about filling out your brackets this year. There are two camps of players who pick brackets. One camp chooses the highest-ranking teams, with an occasional upset here and there. The second camp selects a bunch of the lower-ranked teams to win in hope of getting lucky on an unlikely Cinderella team making it far in the tournament. Here is where the gamblers reside.
What if you rank these investments and concentrate your picks within the top six to eight teams, year in, year out? Wouldn’t your portfolio stand a better chance of ending up in the final four?
Never in history has a number 16-seeded NCAA tournament team beaten a number one-seeded team – ever. As of the start of this year’s March Madness, the first ranked teams had won 80% of their games and the top three-ranked teams had combined for a record of 827 and 300, winning 73%. Taking it a step further, the bottom three-ranked teams only won 22 games in the entire history of the tournament. If that’s not crazy enough, the top three-ranked teams had won more games than the bottom three-ranked teams had played (win or lose).
When looking at your portfolio, owning bottom-ranked offerings can be detrimental to your retirement success. If the March Madness tournament teaches us anything about money, it’s that bottom feeding is gambling.
If the market declines, which investments do you think will perform the poorest? The top-ranked or the bottom-ranked? Which do you think will hold up best? For most individual investors, it is absolutely crucial to have a grouping of the top-ranked contenders in your portfolio.
Just because you own the top-ranked names doesn’t mean that you’ll win the championship every year, because no strategy can assure success or protect against loss. In life and retirement planning, the game plan is to win most of the games, even if you never finish the tourney kissing the trophy.
Unlike basketball, investing is not about being right all the time. It’s about recognizing who the best teams are, rotating out of poor performers, subbing in new ones that are ranked higher and being right most of the time.
If you can come to the realization that it’s okay to be wrong – it’s just not okay to stay wrong, retirement might just come early.
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Adam Koos, CFP, is an award-winning Certified Financial Planner, as well as founder and president of Libertas Wealth Management Group, Inc., a financial management firm, located in Columbus, Ohio.
Securities 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 recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. No strategy assures success or protects against loss.
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