March Madness and Diversification

March 21, 2016

We are nearing the end of the first quarter of 2016, which means March Madness!

How are your brackets holding up this tournament season? I would like to say that I’m an informed player this year, but my brackets tell another story. As much as I’d like to, I’m not watching ESPN or talking about the latest upset at the water cooler or in the break room; I am trying a new approach this year by participating in multiple group brackets, and instead of making the same picks in each one, I decided to diversify! (Yes, I am tying March Madness to financial planning…)  As a result almost every game has a positive outcome for me.  

Diversification: the process of allocating in a way that reduces the exposure to any one particular asset or risk (player or team). A common path toward diversification is to reduce risk or volatility by investing in a variety of assets (teams).

Within your investment portfolio, be it your 401(k), IRA, brokerage, or savings account, proper asset allocation (stocks, bonds, real estate, and cash) can provide the necessary diversification to help prevent investments from falling victim to the market’s volatility. Diversification is also important within the various asset classes, ie: value or growth stocks or short or long-term bonds. Putting it another way, who are this year’s top seeds, where are the perennial contenders, which teams came into the tournament on a win streak, and which limped through the end of the regular season?

Translation: I might not win big in my 2016 bracket selections. However, by diversifying through asset allocation, I am taking on a level of risk for which I am comfortable, for the amount of return that works for me. I might win some, I might lose some, but here is what I am confident about: I am well diversified in my March Madness selections this year, I’m confident I won’t be in last place when they finally cut down the nets in April.