by Zach Swartz
BKD, LLP is an IMA B2B Partner…
For investors, volatile markets can be as distracting as those weeks in March and April when 68 college basketball teams vie for the championship title. While the tournament only lasts a few weeks, there are some interesting investment lessons to learn. Here are three things the tournament can teach investors for their financial futures.
Don’t Bet It All on Last Year’s Winner
When choosing investments, people sometimes make the mistake of picking last year’s winner as the top seed for this year. Just as in the tournament, it’s unlikely last year’s top-performing investment will be next year’s winner. There are many variables to consider when building and rebalancing a portfolio. While a “winning” investment may do well again, the likelihood that it’s the best two years in a row is small.
Understand Your Strategy
Know why you’re going to own a specific investment and the role it’s supposed to play in your portfolio. A coach wouldn’t ask the point guard to play the post, just as you wouldn’t expect bonds to contribute the same return as stocks. Investors should realize the bond portion of their portfolio is there to manage risk first and contribute to returns second.
Stick to the Game Plan
You’ve done your homework to create an investment plan that will meet your needs, just as a coach spends time creating the game plan. During turbulent markets, staying patient can be a challenge. But just because an investment takes a step back doesn’t mean it should be sold. As in the championship game, a coach wouldn’t take out the star player just because the team is losing. When things go awry, investors shouldn’t abandon their plans but instead make small adjustments to adapt and improve.
The fun thing about the tournament is any Division I team could win. Each year, some players return, some graduate and new talent arrives. There’s a new squad every year. Likewise, when investing, it’s important not to carry over last year’s performance to this year’s portfolio. Goals, objectives and market conditions may change, so you have to adjust your plan toward the portfolio that’s best for you.
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