Right now is one of my favorite times of year. I don’t watch much TV, but beginning this
past week, I’ve been glued to the TV. And
I’m not alone. Millions of people around
the country are spending lots of time talking about this, watching the
highlights, combined with lots of cheering and cursing.
Of course, I’m talking about the NCAA Men’s Basketball
Tournament, known as March Madness.
What does this have to do with personal finance? Well, for me, I think the event teaches us
quite a bit.
1. It's difficult to pick winners.
The tournament starts with 64 teams (or 68 if you count the
play-in games). But only 1 can be
crowned champion. By definition, that
means 63 teams (or 67) have to lose.
Serious fans spend lots of time following teams, looking at
stats, win-loss records, and things like RPI
rankings. All in the name of finding the
top team.
But come game time, NONE of those matters. Yes the stats might give you a shot of predicting
correctly, but you just never know.
Teams could be tired, or not motivated, or overconfident, or sick. All things we have no control over.
In the world of personal finance, think about how much time
people spend looking at stats for their investments - returns, risk ratings,
comparisons with a benchmark, etc. All
in the name of finding that top “investment”.
But anything can derail that “perfect” investment. The economy, interest rates, commodity prices
like oil – all things we have no control over.
2. To be
champion, you have to avoid losses.
As obvious as that sounds, the champion has to win their
games each time. After all, a loss sends
a team home.
To make the championship game, they have to survive 6 rounds
(7 including the play-in games).
Lots of people choose winners correctly for a round or two,
but very few people choose correctly all the way.
Similarly, in finance, people typically choose based on
short term results. Who was the best
last year or last month? But to build
wealth, you have to take a long term view and avoid losses.
In basketball, if you lose, you go home and start over next
year. In finance, you lose, you have to
start over and make up that ground before you actually are “earning”.
3. What
you don’t know may surprise you
The great thing about March Madness is that some lesser
known team can shock the tournament and beat a well known team.
This happens regularly each year – and generally results in
cursing as those brackets become useless from that 1 wrong pick.
People are most familiar with the big name programs from the
big colleges that are usually on TV. And
people expect them to win all of the time; after all, everyone knows Kentucky
will win because of their reputation.
Funny how it rarely turns out that way.
In finance, people “know” the big names from
commercials. After all, this
company’s mutual funds must be good because I see them on TV all of the time.
That unknown “investment” or idea may end up being the
best. People often dismiss the lesser
known because, well, it’s lesser known. But
those lesser known ideas may have a big impact on your financial future just like those
unknown schools can have a big impact on the March Madness tournament.
The way to successful long term wealth is simple. It’s hard to pick winners, so focus on
avoiding losses. And be open to new
ideas that you may be unfamiliar to you.
By the way, how’s your bracket doing?
For more tips on how March Madness is like personal finance
(specifically retirement savings), look at this article.
