The second weekend of March Madness kicks off on Thursday, and if your brackets are anything like mine they’re pretty busted. To be fair, while I’m pretty much in dead last across my various pools, there weren’t that many upsets during the first weekend so I have several top seeds still in it. It should make for a fun weekend! And of course, the most important thing is that Virginia Tech won its first two games putting the Hokies in the Sweet 16 for the first time since 1967! (And while I’m on this topic, let me say that every time an announcer comments about some team “that hasn’t made the tournament since 2017” I feel very little sympathy.)
In large part, March Madness is fun because of the upsets. As an example, in the 2018 tournament #1 seed UVA lost to #16 seed University of Maryland, Baltimore County by a whopping 20 points! It was the first time in tournament history that a #1 seed lost in the first round. The unexpected certainly does happen!
All of these upsets make the tournament fun and very hard to predict. To put a finer point on it, if we treated the odds for each game as a coin flip, the odds of picking all 63 games correctly is 1 in 9.2 quintillion. I’ll go ahead and say it – not gonna happen!
And this is where the comparison to investing comes in. The chances of accurately picking how various investments will do over time is also impossible. Not only do you have to pick what they’ll do (go up, down, or remain flat), you also have to correctly identify when they’ll do it and by how much – again and again and again. Because unlike March Madness, where there is one winner and one loser in each game (and once you’re out, you’re out), investments continue to fluctuate throughout time. Yesterday’s winner can be today’s loser. And if you’re not willing to bet the farm on one single company (which you shouldn’t!), you’ll need to do this accurately for multiple companies and investments. Like filling out a bracket with complete accuracy, this is an impossible task.
While your bracket may have small stakes (such as a $50 buy-in), when it comes to investing we’re talking about your life savings. This is what you’re going to need to live on for the rest of your life! Those are high stakes, so we need to get them right.
But Lucy, you just told me I can’t guess correctly? You’re right, I did. And that’s why I believe in some very important investment principles to help smooth out the ride and produce long-term positive returns.
Principles of Investing
Let’s start with what you shouldn’t do:
- Don’t try to outguess the market
- Investing in actively managed funds and picking individual stocks are risky games. They bet on the fact that you know more than the billions of dollars traded every day. Keep in mind that for every trade there is a buyer and a seller who both believe they’re on the right side of the trade. Otherwise, they wouldn’t do it.
- Resist chasing past performance
- Did you hear about a big winner recently and now want to get in on the action? Well, it’s already too late. The secret is out, the positive returns you’ve heard about have already happened, and past performance is no indicator of future performance.
- Avoid market timing
- Holding onto cash to get into the market at the perfect time is a loser’s game. The same goes for trying to sell at the top, right before a market dip. No one knows what the market is going to do, so trying to play the odds is not worth your time.
- Keep emotions out of investing
- Holding onto a stock because of personal attachment or a past mistake (“It has to go up one day!”) turns investing into an emotional game rather than a disciplined practice. When we become emotional about particular investments or market movements, we’re more likely to make poor investment decisions.
- Don’t react to headlines
- Once you read something in the news, so has everyone else, meaning you can’t be the first to get in on the latest “sweet deal.” Plus, you have to know what’s happening and how the markets are going to react to that news. Brexit and Trump’s election are two examples where what happened in the markets (they went up) differed from many people’s expectations of what would happen as a result of these events (that they would go down).
Alright, so here’s what you should do. Because we can’t accurately predict markets and have no control over what they’ll do, we should instead focus on what we can control.
- By owning a small piece of every publically traded company (3,000+ US companies and 8,000+ international companies), you reduce single-company risk and capture a piece of all the big winners at any given time. Diversifying includes owning stocks and bonds, US companies and international companies, large companies and small companies, etc.
- Invest in low-cost funds
- Instead of those actively managed funds mentioned above, utilize low-cost index funds. Higher costs eat into your returns without providing additional value over the long-term. Vanguard is one great option for low-cost index funds.
- Buy low, sell high
- By regularly rebalancing back to your targets (60% stocks and 40% bonds, for example), you ensure you sell what’s done well and buy what’s on sale. Rebalancing once a year, for example, is a disciplined way to ensure you do just that.
- Dollar cost average
- Dollar cost averaging is a fancy term for investing smaller amounts of money at regular intervals, such as automating savings into a 401(k) every month. This helps reduce the impact of market volatility because you’re not putting a large chunk of cash into the markets all at once.
- Let markets work for you
- Over the long-term, markets have rewarded investors with positive returns. Investing is a long-term game, so automate savings and don’t get distracted by daily, weekly, or annual market fluctuations. By investing for the long-term and letting compound interest work to your advantage, your money will grow. As Albert Einstein said, “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” It is even said that he called compound interest “the most powerful force in the universe.” Let these powers work for you!
If you’re intrigued by the prospect of trading and investing in cryptocurrencies like Bitcoin, then hopefully these strategies should be beneficial in that area too. When it comes to cryptocurrencies and blockchain technology, however, there is a lot of new information to take in and concepts to understand. Luckily there are resources available like VanillaCrypto that explain all the basics to familiarize people with these emerging technologies.
The Beauty Of It All
Investing is one of the few things in life where less effort produces better results. By picking a smart strategy (one that is low-cost and diversified), sticking to it (rather than trading in and out of different “hot” stocks), and then automating savings into that strategy, you can set it and forget it, finding yourself with a large pile of cash in decades to come. Embrace this gift! (And please, embrace the Hokies on Friday!)
March will continue to produce madness. Markets will continue to move up and down, but you can focus on what you can control to produce a better investment experience. You might not win your office pool (that’s play money), but you can strategically save, invest, and watch your real money grow. Your future self will thank you.
Bonus Tip: If you go to this page on my site, you can find all of my investment-focused posts under the Principles of Investing heading.