NCAA brackets and the challenge of forecasting

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The NCAA basketball pool is a blast every year. Your cleverly selected bracket plays out as a month-long clash between delight and despair as some of your teams heroically advance and others are squished like bugs.  It’s college sports at its best.

Predicting winners and losers is a great way to entertain yourself every March, but it’s no way to invest.

Of the 12 highest seeded teams in the NCAA tournament, only one – Louisville – made the Final Four. The other eleven got bumped off in early rounds by surprise teams like Harvard and Florida Gulf Coast University, or by their own mistakes.

No matter how much you know about basketball, your bracket was probably full of losers by the Elite Eight, if not before.  Teams that you counted on for easy points were long gone, and teams you never would have picked were flying high.  If you watched the games, you probably wanted to kick the TV at least once or twice.

By the way, in ESPN’s bracket game, 47 of 8.1 million entrants correctly picked the Final Four.

Sure things don’t always pan out

Predicting college basketball is tough, especially in a one-and-done tournament format. And like it or not, picking winning investments is just as difficult. Sure winners often lose and sure losers sometimes win. Even the most celebrated money managers, supported by analysts, economists and elaborate pricing models, make serious gaffes, guessing wrong on the direction of individual securities and of the market as a whole.

The result is the phenomenon we have frequently referenced – active managers failing, on average, to keep up with simple benchmark indexes.

If your bracket featured talented teams like Kansas, Indiana, Miami or Ohio State in the finals, you understand what I’m talking about. Good teams don’t always advance. And good stocks don’t always deliver the return you’d expect.

Own the whole field

As we discussed last week, passive investors don’t try to beat the market with longshot picks. In essence, we bet on the whole field, assured of owning all the winners and avoiding the possibility of getting stuck with a portfolio of nothing but underperformers. By allocating a very small portion of one’s assets to thousands of different stocks, you are basically investing in the force of capitalism as a whole rather than pinning your hopes to the fortunes of any individual company.

You can’t really own the whole field in the NCAA tournament. And you wouldn’t want to. Half the fun is pulling for your teams as the clock ticks down. But investing for your retirement and the security of your family is another matter. You can own the whole field, or a close approximation, via index ETFs. We believe that is the right approach.

Congratulations to the Louisville Cardinals, 2013 champs!


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