Each year around this time an estimated 50 million of us around the country carve out a few minutes of our day to complete a bracket trying to predict which one of the 64 NCAA Men’s College Basketball teams will win the tournament this year. Guessing which team will win can be a lot of fun, but it’s awfully hard to do!
With top seeded teams losing in droves, as seems to happen every year, it quickly becomes apparent just what a fool’s errand predicting can be. After the first Thursday’s 16 games (March 19), only 273 out of the 11.57 million brackets on ESPN.com were still intact.
Warren Buffet made headlines last year by offering $1 billion to anyone completing a perfect bracket. With odds estimated this year at 1:1,610,543,269—worse than one billion to one—you’re actually more likely to win the lottery hundreds of times than to complete a perfect bracket.
Yet, as bad as the odds are, we all still want to try. The desire to best our friends or colleagues at a game of ‘skill’ is just too great. Even the President fills out a bracket each year.
It’s actually not that much different than investing when you think about it.
We’d all love to be able to pick out which investment will fare the best over the coming day, month or year, and reign as champion. In 2014 it was US REITs that were victorious after being the worst equity asset class of the previous year, experiencing a return six times as high as perennial favorite Small Cap Stocks. The big story so far in 2015 has been the strong gains seen on International Markets, who came in as the dark horse in this year’s competition.
Employing professionals to try and hand pick individual winners in your investments hasn’t fared much better. Investors spend approximately $102 billion a year on active managers trying to do exactly that. Looking at the most recent SPIVA study, over the last 10 years, the chances of holding a 9 asset class portfolio where each active manager outperformed their benchmark was 0.00023%, or about a 1 in 430,313 chance.1
After Friday’s games (March 20), only one perfect bracket remained on ESPN. With over 11 million entries—including many highly paid pundits—surely one expert had emerged who had poured over the stats and evaluated all the teams and matchups correctly. Not quite. When the owner of the last perfect bracket was asked what type of research or number crunching he had done, he replied “Nothing, I actually haven’t watched a full game this entire year.” By Saturday afternoon, his bracket had joined the rest in the busted pile.
So does anyone win the investing bracket? Those investors who don’t get caught up in the “madness” — those who don’t waste time and treasure on trying to guess who will be the Cinderella story each year.
The investors who diversify, rebalance and stay invested through the ups and downs are the ones most likely to enjoy the confetti drop with whoever cuts down the net.
Source: Morningstar Direct 2015. Indexes are unmanaged baskets of securities that are not available for direct investment by investors. Index performance does not reflect the expenses associated with the management of an actual portfolio.
Past performance is not a guarantee of future results. All investments involve risk, including loss of principal.
Diversification neither assures a profit nor guarantees against loss in a declining market.
The buying and selling of securities for the purpose of rebalancing may have adverse tax consequences.
1SPIVA® U.S. Year-End 2014