When Investing Isn't

I recently received a “March Madness” promotional offer from an industry publication that involves picking mutual funds which are then put into a bracket similar to the format for the NCAA Men’s basketball tournament. Once you select funds, they are monitored over the same six weeks as the NCAA tournament and a winner is ultimately determined based on the funds’ performance during that timeframe.

Now, I’m no prude. I enjoy March Madness, filling out brackets and watching student athletes leave everything on the court as they strive to make the next round in search of a championship. It’s one of the most exciting events in all of sport and something I look forward to every year.

I also understand different industries wanting to get in on the act and borrow from that kind of excitement to generate excitement of their own. It is relatively harmless fun to pick a few mutual funds and see how they do over a short period of time.

The difference is far too many would describe this as an “investment game.”  In fact, this has absolutely NOTHING to do with investing. It can be argued what kind of time horizon is justified to analyze the return of various investments, but six weeks certainly isn’t sufficient.

Investing, at least as far as the stock market goes, is committing your money to a business with the expectation of obtaining a fair return over time. This return can come from dividends paid out by the business or in appreciation of the value of your stock based on the company’s growth. This stems from the business using your (and other investors) money to hire people, innovate and develop new products and improve operations. This takes time and certainly comes at a risk. The company could lose money or go out of business entirely leaving you with nothing. In fact, the relationship of how risky the business you invest in might be directly relates to how much return you might expect from your investment.

Speculation in the stock market, on the other hand, is attempting to guess about the future movements of a company, a sector or the market at large. In other words, it’s more of a way of placing bets on what you think might happen. The risk here is clear, you could be wrong. In fact, most studies show that our ability to make these guesses (when to get into an investment and when to get out) correctly over and over again is much, much less productive than just choosing a broadly diversified portfolio of investments and then staying invested according to whatever mix of stocks, bonds and cash fits our risk tolerance and goals over the long run.

If the goal is to have some fun with a non-basketball “bet” during March Madness and seeing what a spin of the market wheel gets you over a six week period, I hope all involved enjoy. What I want to make sure the average investor out there is crystal clear on, however, is to not recognize an entertaining, speculative game for the true benefit of the capital markets, which is to enjoy a long term return equivalent to the amount of risk being taken.

Speculation can be fun. Investing should be reserved for helping us meet our long term goals. Knowing the difference can be the key to a successful experience with either.