If you’re a college basketball fan, this is your favorite time of year. March Madness is in full swing. That means a full schedule of games every weekend, buzzer-beating finishes and unbelievable upsets. If you’re like many fans, your bracket is already a mess.
It’s nearly impossible to predict the outcome of the NCAA Tournament. According to a Duke University professor, the odds of predicting a perfect bracket are 1 in 2.4 trillion.1 Even getting the Final Four correct can be difficult: In last year’s Capital One Bracket Challenge, only 54 entries had the Final Four teams correct.2
It may also feel like it’s impossible to predict the movement of the financial markets. The major indexes can swing in any direction on any given day, influenced by an infinite number of events and updates from around the world. In the short term, it’s virtually impossible to predict where the markets are headed.
But can you use the winner of the NCAA Tournament to make a market prediction? Researchers from Schaeffer’s Investment Research recently studied S&P 500 index returns from April to December along with past NCAA Tournament champions to see if there’s any correlation between the two.
The research found that the market has consistently had positive annual returns when the NCAA Tournament champion has come from the Southeastern Conference (SEC). That’s happened 11 times. The S&P 500 has gone on to have a positive return the rest of the year in each of those instances. The median return from April to December when the champion is an SEC team is 9.56 percent.3
The market has also had positive returns at least 75 percent of the time when the champion has come from the ACC, Pac-12 or Big East. The ACC and Pac-12 have produced the most champions, with each conference winning 16 times. During years in which the ACC has won, the market had a positive return 75 percent of the time, with a median return of 9.59 percent. When the Pac-12 wins, the market has been positive 88 percent of the time, with a median return of 8.91 percent.3
When does the S&P 500 have a negative return from April to December? When the NCAA Tournament winner comes from the Big Ten Conference. In those years, the market has been positive only 36 percent of the time, with a median return of -4.76 percent.3
Coincidence Isn’t the Same Thing as Correlation
Of course, just because these patterns exist doesn’t mean there’s an actual correlation between the tournament winner and the returns of the market. There’s no factor tying the championship outcome to the S&P 500, so these patterns are entirely coincidental. They shouldn’t be used to try to make any kind of market predictions.
If you want to stabilize your investment performance and reduce volatility, there are other steps you can take besides relying on the outcome of a basketball tournament. Below are a few steps to consider:
Review your allocation. As you get older and approach retirement, it’s natural to become less tolerant of risk. You may not be able to stomach the ups and downs of the market like you used to. That’s understandable. After all, you’ll need to rely on those savings for income in the near future.
Now could be a good time to review your allocation with your financial professional. It’s possible that your current allocation isn’t right for your goals, needs and risk tolerance.
Rebalance. The market moves up and down, but not all asset classes move in the same direction at the same time. As some asset classes increase in value, others decline. That means your actual allocation is always in a state of flux. Over time, it may become far different than your desired allocation.
It’s helpful to regularly rebalance your portfolio so it always adjusts back to your target allocation. When you rebalance, you sell some of the assets that have increased in value and buy those that have declined. That can help you lock in gains and stay aligned with your desired strategy.
Consider using an annuity (if appropriate). An annuity can be an effective tool to potentially increase your assets but also limit downside risk. For example, a fixed indexed annuity pays an interest rate based on the performance of an index, like the S&P 500. The better the index performs over a defined period, the higher your rate. If it performs poorly, you may get little or no interest.
In a fixed indexed annuity, however, your principal is guaranteed*. There’s no risk of loss due to market performance. That means you get upside potential without the volatility.
Want to take steps to make your portfolio less volatile? Don’t look toward coincidental trends. Instead, implement a thoughtful strategy. Contact us today at Emerald Blue Advisors. We can help you review your portfolio and find areas for improvement. Let’s connect soon and start the conversation.
*Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values.
Investment advisory services are offered through Emerald Blue Advisors, Inc., a registered investment adviser offering advisory services in the State of California and other jurisdictions where registered or exempted. This communication is not to be directly or indirectly interpreted as a solicitation of investment advisory services to residents of another jurisdiction unless otherwise permitted. Nothing in this document is intended as legal, accounting, or tax advice, and is for informational purposes only.
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