As we enter into the month of April, the NCAA tournament in college basketball is coming to an end. Like every other year, there have been a number of upsets that have foiled many predictions on who would make it to the Final Four. I’ve heard many different guesses about who was going to make it in the tournament and who wasn’t. But the thing that has surprised me the most is the method by which most people tend to pick their winners.
College basketball fans, just like all other sports fans, don’t factor into their predictions who they think will win so much as they do who they hope will win. In other words, they pick their favorites. They place all their chips on the team they root for. Do they actually think their team will win? It’s possible. But, chances are, there’s a little bit of self deception involved. Because regardless of whom they’re cheering for, with all of the talented teams competing for the Title, the odds of picking the one winning team are fairly small. Nevertheless, fans don’t hesitate to root for the home team.
As investors, we often do the same thing. Now, it’s not quite the same as an athletic competition. In sporting events, you either win or lose. With investing, you can win a lot, lose a lot, win a little, lose a little, or break even. But the principle is the same. Just like sports fans root for their favorite teams, investor’s root for their favorite stocks or favorite industries. They get caught up in the hype and the drama, and they put all of their money into one pot. That methodology, as we know, is a recipe for disaster.
When you’re choosing which areas to invest in, you want to get a good mix. If there is one important rule you need to know for investing, this is it. When you distribute your assets prudently and wisely over a broad range of asset categories, you will steadily and surely maximize your chances of growing and preserving your wealth. In fact, according to The Financial Analysts Journal, the proper allocation of those assets in a diversified portfolio accounts for 91.5% of the positive expected return. Without a good mix, you would be just as prudent to trust your investment decisions to the flipping of a coin.
Back to the sports analogy, choosing a good mix is a lot like how people behave in fantasy sports. When people play “fantasy football” or “fantasy baseball,” they choose different players from different teams to create their own winning team. A person could choose all his players from one team, but what if that team begins to do poorly? The better strategy is to choose a few players from each team so that you minimize those adverse effects. In the same way, you want to make your investment decisions by choosing a variety of areas to invest in. One company, one industry, one type investment isn’t going to cut it. You’ve got to spread it around. It’s all about the mix.