March is the pinnacle of the year for basketball fans with the annual March Madness NCAA Tournament. Brackets are built, buzzer beater shots are made, Cinderella teams advance deep into the tournament and the National Champion is crowned. But how does this relate to investing and capital markets?
Each person that completes an NCAA bracket is prone to certain biases such as the home team bias and recency bias. Most people pick their alma mater or hometown team to advance further into the tournament than the national rankings would suggest. Investors can be prone to the same issues with their portfolio. Many have a home country bias and maintain a significant allocation to domestic stocks while incorporating limited exposure to international stocks. Even though domestic stocks have outperformed for the past 10 years, we think global diversification is crucial to portfolios going forward.
Recency bias is the tendency to believe that something is more likely to happen again because it occurred in the recent past. Many bracketologists start watching games in late February and early March then pick their teams based on the recent games. But in reality, the season starts in November and we should look at the full body of work, not just the recent games. Many investors fall victim to the same bias by extrapolating recent stock or index performance into long-term future returns.
Over short enough time periods, there is a degree of randomness to both basketball and financial markets. It’s what gives March its “madness” and makes short-term market fluctuations maddening. Whether it be a first round exit from a #1 or #2 seed, a Cinderella team advancing to the second or third weekend, or the stock market losing 7% in a single week like we experienced in December.
Whether you are watching all of the games or tuning in to CNBC for minute by minute updates on markets, the drama goes up the more you watch. As hard as it may be, we urge clients not to let the media play on your emotions with your portfolio. Investors are often rewarded for sticking to their long-term diversified allocation.
|Asset Index Category||Category||Category||5-Year||10-Year|
|3 Months||2019 YTD||Average||Average|
|S&P 500 Index – Large Companies||0.9%||11.0%||8.4%||14.2%|
|S&P 400 Index – Mid-Size Companies||1.7%||14.9%||6.8%||15.6%|
|Russell 2000 Index – Small Companies||2.8%||16.8%||5.9%||15.0%|
|MSCI ACWI – Global (U.S. & Intl. Stocks)||3.1%||11.4%||6.2%||13.1%|
|MSCI EAFE Index – Developed Intl.||4.0%||9.3%||2.1%||9.5%|
|MSCI EM Index – Emerging Markets||6.1%||9.0%||4.1%||10.3%|
|Short-Term Corporate Bonds||1.4%||1.0%||1.3%||2.7%|
|International Government Bonds||3.3%||0.4%||-0.1%||2.3%|
|Bloomberg Commodity Index||-0.8%||6.5%||-8.8%||-2.2%|
|Dow Jones U.S. Real Estate||3.7%||12.4%||8.8%||18.1%|