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As millions of people around the world prepare to watch Super Bowl XLVIII this Sunday, at least some are concerned more about how the outcome may affect their portfolios than the game itself.
 
According to the Super Bowl Indicator (SBI) theory, the winning team indicates the fate of the stock market for the rest of the year.
The theory holds that if a team from the former American Football League wins, the outlook for stocks is bearish. On the other hand, a win by an original National Football League team indicates that the market will go up that year. The SBI has been remarkably accurate, correctly predicting the annual direction of the stock market about 75% of the time…
 
However, the theory didn’t hold up so well last year. The Baltimore Ravens won, so if you adjusted your investments thinking that the market would not do well you would have missed out on the best year for the stock market since 1997.¹
 
The central problem with this theory — and many others out there — is a confusion of correlation with causation.
 
Rationally, we know that football and markets have nothing in common. But theories like this have an almost seductive hold on us, in part because our brains are hard wired to take mental shortcuts. For example, we tend to think that trends will continue. Applied to stock markets, this can lead investors to believe that a rising market will keep rising…and that is how booms become bubbles. Conversely, when markets are falling and the economy is in trouble, it is hard to believe that the stock market will ever go up again.
 
Life is chaotic and uncertain, and investing is no different. We yearn for signs and directions that will make the markets seem just a little more orderly and predictable. Most of us are smart enough to shun the more obviously implausible theories…but many investors still believe in a theory of investing that has repeatedly proved unreliably uncertain but remains widely popular: active management.
 
As studies have shown, active investment management works only a small and inconsistent amount of the time.² It has proven difficult, if not impossible, to predict which managers will under- or outperform in the future.
 
Markets may be chaotic and unpredictable over the short term, but in the long-term they are remarkably efficient and almost impossible to beat. It is much more prudent to invest for the long-term, allocate your portfolio prudently and stay the course.
 
And one more thing about that Super Bowl Indicator theory… before you start rooting against the Broncos (an original AFL team), keep in mind that the last two times the Broncos won the Super Bowl, the S&P 500 in those years added more 20%.³
 
Past performance does not guarantee future results.
 

¹Source: Morningstar Direct, January 2014
²Source: Standard & Poor’s Indices Versus Active Funds Scorecard, December 2013
³Source: Morningstar Direct