USA TODAY US Edition

MONEY Investing? Don’t let March be madness

Research shows sports fans often let their emotions get the best of them

- Mark Hulbert Special to USA TODAY Mark Hulbert, founder of the Hulbert Financial Digest, has been tracking investment advisers’ performanc­es for four decades. For more informatio­n, email him at mark@hulbertrat­ings.com or go to www.hulbertrat­ings.com.

It’s called March Madness for a reason.

Basketball fans aren’t thinking about the stock market when they refer to the annual college tournament that begins this week as “March Madness.” But the descriptio­n still fits.

That’s because researcher­s have found that the agony and ecstasy fans feel when their favorite teams win or lose can lead them to do foolish things with their investment portfolios.

The most cited study of the interplay between sports and investing appeared a decade ago in the prestigiou­s academic publicatio­n The Journal of Finance.

The study, “Sports Sentiment and Stock Returns,” was conducted by finance professors Alex Edmans of the London Business School; Diego Garcia of the University of Colorado Boulder; and Oyvind Norli of the BI Norwegian Business School.

The professors focused on more than 2,600 widely followed sporting events at major internatio­nal tournament­s involving soccer, cricket, rugby, hockey or basketball.

On average, following the eliminatio­n of a nation’s team from those tournament­s, its stock market performed significan­tly worse. The researcher­s were unable to find any rational economic explanatio­n for why this should happen.

It is interestin­g to note that the professors found a much smaller positive effect on the stock markets of countries whose teams won.

The implicatio­n of this imbalance is that global stocks, on average, should be below-average performers during widely followed competitio­ns such as the World Cup or the Olympics. And, sure enough, other studies have found this to be true.

Because the professors focused on national teams in internatio­nal competitio­ns, they did not study the effect of March Madness games on the U.S. market. But, in an email, Edmans said the same principles would still apply.

The U.S. stock market should therefore face stronger-than-usual obstacles to growth over the next couple of weeks.

Note, however, that the expected decline in the stock market’s return because of March Madness is too small to justify paying the commission­s and taxes on a short-term trade.

A more appropriat­e lesson to draw is this: Do nothing with your portfolio for several days af- ter your team loses.

Many of you will have difficulty accepting that your investment behavior is affected by something as irrelevant as whether your favorite team wins or loses.

But there is an impressive body of psychologi­cal research showing that our moods often trump our rational investment analysis.

Factors influencin­g market psychology include whether New York City is sunny rather than cloudy; whether it’s closer to a new moon than a full one; and the impact of investors’ Seasonal Affective Disorder on their portfolio decisions.

Given this extensive research, it would be surprising if your favorite teams’ loss didn’t sway your investment behavior.

The broader lesson of March Madness is that you should do whatever is necessary to protect your portfolios from your moods. You should have a prearrange­d game plan for what you will do with your portfolio and when, and then develop the will power to stick to it.

If you do that, you can fully enjoy March Madness over the next three weeks, secure in the knowledge that you won’t compound your favorite team’s losses by doing something stupid with your investment­s.

 ??  ?? The broader lesson of March Madness is that you should do whatever is necessary to protect your portfolios from your moods.
The broader lesson of March Madness is that you should do whatever is necessary to protect your portfolios from your moods.
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