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March Madness and Your Money

March Madness and Your Money

For some time now, I’ve been blogging on different financial topics. I trust you find most of these topics interesting. However there may be occasions, like today, where the topic might make you blink. Ready?

Don’t let the ball control you.

Pretty cryptic, right? But take a look at your calendar and things will start to become clear. What month is it? That’s right, it’s March. And we all know what happens in March.

Madness.

March Madness, to be exact. The annual NCAA basketball tournament to crown a national champion. It’s a three-week event that allegedly leads to higher gambling1 and lower productivity.2 But the real danger, to you at least, is the impact that it has on investing.

What’s the correlation between March Madness and investing? While there’s no direct link between basketball and the markets, one can impact the other. Specifically, I’m speaking about the effect March Madness has on people’s emotions. We all know that following sports often involves emotional commitment. We don’t just watch teams play, we root for them. Whether it’s our local school, our alma mater, the schools our children go to, or just because we like their mascot, many of us tend to favor one team over the other. We’re ecstatic when they win; we’re depressed when they lose.

Some people might not be quite so affected by the way the ball bounces. But for those who are, it’s crucial that you remember not to make emotional investment decisions. This is never truer than during the month of March. You see, some people are more likely to make impulsive decisions based solely on how they are feeling. So if you’re emotionally invested in the tournament, try to resist making any meaningful decisions until it’s over. If your team loses, you might be so depressed or angry that you end up doing things you regret. Especially when it comes to your portfolio.

Seems like mere common sense, doesn’t it? But that doesn’t mean it’s not worth talking about. One study3 done in 2005 looked at the effect of countries’ stock markets after their national teams lose in the World Cup. They found in many cases that if a country’s team lost, their stock market would drop 38 points. And that’s just the average—imagine what the number might be for individuals. The only explanation for this is that the loss influenced investors’ moods to a startling degree.

When it comes to our finances, we can’t afford to let our emotions get the better of us. The wisest investing is done with our heads, not with our hearts. So if you find yourself sitting on the couch, watching a game, remember: don’t let the ball control you!

Sources:

1 Tim Otteman, “NCAA March Madness Can Cause Lifetime Gambling Problems,” US News, March 17, 2009. http://www.usnews.com/opinion/articles/2009/03/17/ncaa-march-madness-can...

2 Aaron Crowe, “March Madness a march to lower work productivity”, DailyFinance.com, March 11, 2010. http://www.dailyfinance.com/2010/03/11/march-madness-a-march-to-lower-wo...

3 Alex Edmans, Diego Garcia, Oyvind Norli, “Sports Sentiment and Stock Returns,” May 1, 2006. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=677103