I’ve started typing this article just three hours before the start of one of the biggest weekends in sports each year. It’s the beginning of the March Madness tournament, when 68 of the best college basketball teams in the country go head-to-head in arenas all over the U.S. in a battle to determine the NCAA’s champion… the best team in the country. As millions of brackets are filled out, most are unaware of what the March Madness tournament can teach you about investing. Or said another way, the way you fill out your brackets might say a lot about you as an investor!
Each year, the NCAA determines who the top ranked (or “seeded”) teams are on Selection Sunday, which took place this past Sunday, March 11th. This ranking system uses each team’s record this season, their strength of schedule, and resulting performance in their conference championships. In other words, how a team is seeded is determined by a six-month look-back at each team’s performance, relative to all the other teams in the NCAA, after which they are ranked from 1 to 16 in four different brackets.
The historical results are interesting, I think. For instance, as you can see in the table below, not a single last-place (16th seeded) team has ever won. Not a championship… no. They’ve never won a single game! So for those individuals who pick a 16th seeded team to win, well… let’s just say you’re betting against some seriously horrible, uphill odds!
Here are a few more fun facts:
- In 33 years of tournament history, there have only been three times when a #5 (or lower) ranked team won the championship.
- #1-ranked teams have won the highest number of total games at almost 80% (79.86%).
- The top 5-ranked teams have a combined winning record of 68.13% while the bottom 5 seeds have only won 17% of their games.
- Even more interesting, the #1 ranked teams have won more games than all of the bottom-three seeds, combined!
How does this relate to investing your hard-earned retirement dollars? Well, how do you invest your money? Let’s pretend the investments in your portfolio are “teams” in a tournament (because they are, as you’ll learn in a few minutes).
Do you put a little bit of your money into every team (investment) available, even the ones that have a horrible recent track record? A lot of people do! It’s not the investors’ fault, but we see it all the time when new clients come into our office.
Much like picking your brackets in the March Madness tourney, I’d like to suggest you should pick your investments in a similar fashion. Now, it’s not advisable to pick THE top ranked investment and put ALL your eggs in one basket… but it does make a lot of sense when you diversify your money across only the top-ranked investments; say, the top 10 – 20th percentile and then track them from there.
For instance, as you can see in the screenshot below, I use a proprietary ranking system as part of our patented Defense First© portfolio management strategy. Think of the ranking system as being similar to that of the NCAA teams and how they’re seeded. I’m looking back at the “season,” observing the wins vs. losses, and comparing them all to each other on a relative basis, selecting the top-ranked “teams” as those in which I invest our clients’ money.
The above screenshot is simply a ranking of the S&P 500 stocks, but this can be done with international stocks, bonds, commodities, currencies, ETFs, etc. The chart on the right is just a GrubHub (GRUB) chart and the panes at the bottom are two separate RSI (Relative Strength Index) calculations that I use as additional pieces of analysis to dive deeper into my buy-side strategy.
The point here is, too many investors “gamble” with their money by throwing it at a bunch of random investments just because they look “diversified” on paper. Without an additional set of filters and methods of drilling down into more recent, stronger investments, you can put yourself at a disadvantage, causing a lag in your retirement portfolio, not unlike having the emergency brake on while driving down the highway (not to mention, it smells horrible)!
Okay, enough of this nerdy stuff. Let’s go watch some basketball!
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The opinions mentioned 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 adviser and strongly consider interviewing a fee-only financial advisory firm, prior to investing. Past performance is not guarantee of future results. Economic forecasts set forth may not develop as predicted. The views and opinions expressed in this commentary are those of Adam D. Koos, CFP® and do not represent the views of TD Ameritrade Institutional and its affiliates. Investing involves risk including loss of principal.