March Madness is Nearly Upon Us
Sharpen your pencils.
Yesterday was Selection Sunday for the 2016 NCAA basketball tournament, and according to the American Gaming Association, a record number of Americans plan to fill out tourney brackets this year. More than 40 million sports fans are expected to bet more than $9 billion – roughly triple what was bet on the Super Bowl.
Betting on sports is one of the most-common ways that the average person gambles. From the weekly football office pool to the Final Four, sports betting is a long-standing American tradition. (Incidentally, March is “Problem Gambling Awareness Month.”)
Investing is often compared to gambling. Investing and gambling share a significant common thread: both are all about odds. Did you know that investment analysts and financial planners regularly use “Monte Carlo” simulations to model the probabilities of potential outcomes?
There seems to be a disconnect with many investors when I bring up the topic of risk. Most folks seem to mistakenly believe that risky investments will produce higher returns. Allow me to state the obvious:
If risky investments could be counted on for higher returns, then they would not be risky.
It is easy to see that many risky activities have low expected returns. Most of us do not expect that money bet on an NCAA basketball bracket will produce a return. Likewise, one doesn’t really expect that playing roulette or blackjack will provide a return — you might be happy breaking even. So why do we associate risky investments with higher returns?
Many investors recognize the value of diversification across different asset classes. This is a risk management strategy; spreading your money across different investments can minimize potential losses. Even if you choose a clunker of a mutual fund, you aren’t likely to lose all of your investment. But if you toss $20 into the NCAA office pool and don’t win, you do lose all of your capital. When betting on sports (or really any other pure gambling activity), there are very few risk-management or loss-mitigation strategies.
Therein lies the key difference between investing and gambling. As an investor, you have a variety of options to prevent total loss of risked capital.
Life expectancy is all about playing the odds, too. The cost of life insurance is based on how long actuaries predict you will live, depending on factors such as your age, gender, weight, and medical history. Should you begin claiming Social Security at age 62, 66, or 70? The answer depends on the odds that you will live long enough for the larger benefit to justify the wait.
When it comes to your financial life, almost everything you do is a bet. Hopefully it is an educated bet, but it remains a bet. From time to time you’ll be wrong, so limit how much risk you take. Keep costs low and diversification high. You’ll vastly improve your odds of having a larger retirement nest egg — one that you won’t outlive.
This column was featured in the March 6 Knoxville News-Sentinel. You can read it here: March Madness is Nearly Upon Us
Meet the Author
Tom Coulter, CPA
Tom is the President and a founder of Meridian Trust. Tom graduated from The University of Tennessee, Knoxville, in accounting with honors, in 1978. Tom previously worked for the international accounting firm, Deloitte. He later joined the financial medical advising firm, FIS Associates, before founding Meridian Trust in 1997. Tom has worked extensively in retirement planning, taxation, estate and financial planning and investment management. He is a Certified Public Accountant, a member of the American Institute of CPAs (AICPA), and the Tennessee Society of CPAs (TSCPA).
Tom is also credentialed as a Personal Financial Specialist (PFS) by the AICPA.