Saturday, June 09, 2018

Can You and Your Clients Count on Social Security?

“Today more people believe in UFOs than believe that Social Security will take care of their retirement.” -- Scott Cook, billionaire cofounder of Intuit.

“Before Social Security existed, about half of America's senior citizens lived in poverty.”Senator, Bernie Sanders

Depending on your point of view, Social Security is either one of the Big Government’s greatest social achievements, or it’s just another heavy-handing tax on the first $128K of your income and a well-intended social safety net that’s poised to collapse on itself.

A Gallup poll found that half of working Americans don't think they'll receive any benefits when they retire. In fact, a new report this week from the trustees of Social Security said the program's costs are expected to exceed its income this year for the first time since 1982. That shortfall will force the U.S. government to dip into the retirement system's trust fund to pay benefits to participants. How serious a problem is that?

Well, if the program’s reserves are depleted as expected by 2034, the system won’t be able to pay all the benefits retired workers are entitled to. Experts say the program could still honor three-fourths of benefit claims if its reserves are depleted post-2034. But even at 100-percent, payouts won’t be enough to meet the needs of most retired Americans.

This much is clear. Over 10,000 Boomers a day are filing for Social Security benefits for the first time. Confusion over the program’s future is causing many retirees and near-retirees to make ill-advised filing decisions.

To help separate Social Security fact from fiction, a number of our clients have been fielding media inquiries lately about some of the biggest myths about the program. Here are some excerpts:

Spousal Benefits

According to Blake Christian, CPA, a partner of Long Beach, California-based HCVT, “Many taxpayers are confused about how Social Security benefits vests with respect to surviving spouses of a decedent or a former spouse.  Generally a spouse, or former spouse (‘requesting spouse’), who was married for at least 10 years is entitled to receive up to 50 percent of the Social Security benefits of their spouse or former spouse. In order to claim spousal benefits, the spouse requesting benefits must meet the following three tests:
a) The requesting spouse must generally be 62 years or older, and
b) The related spouse must have reached Social Security eligibility and
c) Have filed to receive their benefits.
Christian added that if the spouse has deferred claiming Social Security benefits in order to increase future pay-outs, the requesting spouse must also wait for their share. “Divorced spouses who have not re-married, are likewise eligible to claim up to 50 percent of their former spouse's Social Security benefits once the requesting spouse and ex-spouse reach 62; however, the requesting spouse is not required to wait until their ex-spouse files for benefits. If newly divorced, there is also a two-year waiting period before benefits are available to the requesting ex-spouse. It is worth noting that these spousal benefits do not reduce amounts payable to the ex-spouse or the new spouse (if the ex re-married),” added Christian.

More solvent than you think

Matt Topley
, chief investment officer of Fortis Wealth in Valley Forge, PA thinks that predictions of Social Security’s demise are greatly exaggerated. “If we increased the retirement age by two years and slightly increased contributions for high wage earners, Social Security would be solvent for another 100 years.  Since the death of pensions in the U.S., Social Security has become vital for retirement--not just for the working class, but middle class as well.” According to Topley, the meager balances in the average American’s 401(k) account “tell a dismal story on the economic future for retirees,” added Topley.

Taxability of Social Security benefits

HCVT’s Christian said many retirees to continue part-time work into their 60s and 70s. Understanding how part-time work impacts the taxability of their Social Security benefits is critically important. “Knowing these rules will allow retirees to better time their Social Security elections as well as other income and expense items,” noted Christian.
Even though most taxpayers never received any tax benefit when they paid into the Social Security system, Congress still subjects up to 85-percent of the related Social Security benefits to potential taxation in retirement years. “This taxability concept runs counter to most tax rules and is seldom discussed,” said Christian. “From a state tax perspective, the rules get even more complex. 36 states either have no state income tax or exclude Social Security benefits from taxation. However, at least four states, including: Minnesota, North Dakota, Vermont and West Virginia follow federal rules and tax up to 85-percent of Social Security benefits. Colorado, Connecticut, Kansas, Missouri, Montana, Nebraska, New Mexico and Utah also tax all or a portion of such benefits, depending on specific demographics of the recipients.  While state taxation may not dictate where to retire, it should be factored into retirement planning,” Christian added.
From a federal standpoint, it gets fairly complicated, too. Just know the following thresholds, said Christian:

Single Filers: with 2017 MAGI between $25,000 to $34,000 retirees were required to include 50% of their Social Security Benefits in taxable income on page 1. Taxpayers with MAGI in excess of $34,000 must include 85 percent of Social Security benefit in taxable income.

Joint Filers:
with MAGI between $32,000 and $44,000 in 2017 were required to include 85% of their Social Security benefits in taxable income. MAGI over $44,000 would have triggered an 85% inclusion.”


Just as you need a well-diversified portfolio of investments during your wealth accumulation years, you need a well-diversified portfolio of income streams during your retirement (i.e. wealth drawdown) years. Our friends at Independence Advisors in Wayne, PA have more great resources about Social Security planning.

Best, HB

*** Take our Insta-Poll and see how you stack up to your peers.

TAGS:  Matt Topley, Fortis Wealth, Blake Christian, HCVT, social security insolvent, social security myths

Wednesday, May 30, 2018

HB Featured in ’25 Financial Advisor Marketing Ideas’ (Fit Small Business)

As many of you know, we’ve long advocated “Taking the High Road” when it comes to providing clients, prospects and followers with concise, highly relevant content. Thanks to the folks at Fit Small (FSB), we’re not the only ones who agree. FSB was kind enough to list us as #9 in their 2018 listing of 25 Financial Advisor Marketing Ideas & Strategies

Too swamped to produce regular original blog posts, but you don’t want to send out canned, aggregated content?

Try this approach

Every few days, share with your clients/prospects a link to an article or broadcast clip from the mainstream financial media (e.g., “New Tax Rules Allow 529 Plans Withdrawals for K-12”). But instead of just giving your audience another link and FYI, add some of your own color commentary about the topic. Explain why the New 529 rules are so beneficial to your readers and how the journalist/reporters could have done a better job of explaining the nuances of the new rules for college and prep school savers. If space permits, remind readers about the dangers of taking all the financial advice they consume in the mainstream media can be misleading—even if provided by ethical, hard-working journalists.

At a time when we’re all inundated with too much news, information and noise, you’ll position yourself as a true thought leader if you can be not only an aggregator and curator of valuable information for your clients and followers—but a value added “complexity filter” as well.

If you have time, there are 24 other good tips in the Fit Small Business article (it’s a very quick read)

Best, HB

*** Take our Insta-Poll and see how you stack up to your peers.

TAGS: Hank Berkowitz, HB Publishing & Marketing, Fit Small Business, Taking the High Road

Wednesday, May 16, 2018

10 Reasons Why Tech Tools Won’t Make You a Better Writer

Apps, smart devices and AI tools are taking over every part of our lives. So, it’s tempting to use tech crutch when you have to dash out a blog post, short article or another chapter of your long-delayed book.
While technology can be a great backstop for the mundane aspects of writing, it’s no substitute for creativity and shaping your true voice. Plus, tech tools take everything literally. They can be counterproductive when you’re trying to be literary or literate.
As Lucy Miller noted in Ragan’s PR Daily recently, “Proofreading software and grammar checkers—those blessed gifts from above that highlight embarrassing errors and silly mistakes—are wonderful aids, but they are far from comprehensive.”  Amen, Lucy.
If you rely on your proofreading software too much, Miller offers five good reasons to reconsider:
1. Grammar checkers go strictly by the book.
Grammar checkers or proofreaders are software programs that understand the binary code version of whichever grammar rulebook was consulted in the development process.
“Writing is not math,” noted Miller. “Language is flexible and subject to change—as are the rulebooks that we adhere to. 
2. Grammar checkers are outdated.
Merriam-Webster’s dictionary added more than 1,000 words last year. “What a term means today might be radically different from what it meant 20 years ago. Plus, new words and slang are created just about every day,” explained Miller.
3. What you wrote is not what you meant.
According to Miller, most proofreading programs are unable to distinguish between similar terms such as effect and affect, or every day and everyday—and forget about correcting misplaced commas. “Most also have a tough time catching nitpicky grammatical issues. Word’s spell checker is blissfully unaware of the following glaring errors:
  • Piece be with you.
  • She shows such love and infection.”

4. Too much tech can make you lazy.
According to Miller, over-reliance on proofreading software can stunt your growth as an author and lull you into sloppy habits and a false sense of security.
Working without a net forces you to read and edit more carefully, noted Miller. “If you rely on technology to catch grammatical errors, why bother to learn the rules yourself? Tech reliance can cause your writing and editing muscles to atrophy.” 
5. Editing programs often replace the human touch.
The human eye has more proofing power than any software available today—especially if someone hasn’t reviewed the content before. “It’s amazing what technology can do, but human intuition, nuance, humor, context and experience can improve any piece,” observed Miller. “Proofreading programs certainly are useful, but software shouldn’t be used at the expense of human review.”
Here are some of our own favorites:

6. Read your work out loud or better yet, dictate it into your smartphone voice recorder and play it back. You may not like what you sound like, but this technique will prevent from straying too far from your point and from falling into the run-on-sentence rabbit hole.

We work with a number of advisors who can get up in front of 5,000 people and give a flawless presentation with little or no rehearsal--but they freeze up like alligators in the Arctic when they have to sit down at the keyboard. We don’t have them write anything for us at first. We just “interview” them with topic-specific questions related to their planned blog posts, articles, even books. Once they see a draft of our “interview” write-up, then guess who suddenly become eagle-eyed editors?

7. Walk away for at least an hour. What looked so brilliant before you took your break suddenly stinks looks a garbage dump on a hot summer day. Don’t despair, that’s what first drafts are supposed to do anyway (see #9 below).

8. Start with the end in mind. Write the conclusion first, then three or four summary bullet points (i.e. Key Takeaways). What do you really want readers to take away from your article or post? Then play around with the headline (or the cover of your book). You have no choice but to be concise and on point.

9. Write quickly.  Just let it flow. Don’t worry about grammar, sentence structure and punctuation. Let it rip! Don’t be a writer—be a story teller—then revise, revise and revise. Blogger Hannah Heath explains why you should let your first draft suck and Vaibhav Vardhan explains why your first draft is supposed to suck.

10. Give it the relevance check. We all have a mental picture of our core audience when we write. We know who are biggest fans (and critics) are. Imagine them looking over your shoulder before you hit the post, send or publish button. What would their reaction be? If it stings, give your piece another tune-up. There’s no charge for parts, just for the labor.


E.B. White
said, “writing is hard work and bad for the health.” Perhaps it is, but it’s an essential part of communicating with your followers and being a thought leader. Don’t let perfection be the tyranny of progress. Set a deadline. Go with your best effort, and then revise, revise and revise even after it’s been published. That’s one thing that’s great about publishing in today’s electronic age. It’s never been easier to update.

*** Take our Insta-Poll and see how you stack up to your peers.

TAGS: Proofreading, grammar software, Lucy Miller, Vaibhav Vardhan, EB White, becoming a better writer

Tuesday, May 08, 2018

Be Entrepreneurial (even if you never start a business)

With graduation season upon us, the latest crop of smart, ambitious and hopeful young adults will officially enter the world of adulthood. For most, that will mean entering the workforce immediately or perhaps after one last overseas trip.

Today’s kids have more pressure on them than any previous generation to show ROI on their monstrous tuition bills and/or student loans. These young people aren’t stupid (or lazy). Sure, they want to put their hard-earned knowledge to good use, but they know they’ll be changing jobs every year or two for the early part of their careers. They know they’ll have to jump ship often in order to get a significant increase in pay and responsibility. They know they’ll have to reinvent themselves continuously so they don’t get “disrupted.” There’s no ladder for this generation to climb except the one that they build for themselves. They’ll have to go out and find their own mentors, too.

Many universities and most business schools offer courses like “Principles of Innovation and Entrepreneurship.” It’s debatable whether or not you can really teach entrepreneurship, but you can certainly make natural entrepreneurs better at their craft. It’s also helpful for all of tomorrow’s future leaders to learn how to become more entrepreneurial.

Our client Anthony Glomski, founder of LA-based AG Asset Advisory told me recently that “Entrepreneurs figure things out. Problems are puzzles they solve. This requires actually ‘doing’ and lots of self-study like podcasts, reading, TED Talks, etc.  This is the stuff that matters,” added Glomski, author of the new book: Liquidity & You: A Personal Guide for Tech and Business Entrepreneurs Approaching an Exit.

Our Take: You don’t have to be in a California garage working on the next billion dollar startup to benefit from Glomski’s advice.

Another of our clients, Blake Christian, CPA of Long Beach, CA-based HCVT, said that regardless of your major and career, “always keep your eyes open for other business and investment opportunities that you may be able to handle in your off hours.  Most passions can be turned into profitable business ventures,” added Christian, author of the new book, The Benefits of Becoming a CPA-Preneur .

Our client Kyle Walters, founder of Dallas-based Atlas Wealth Advisors and a partner of L&H CPAs told me, “Most people think success is about being right and not failing. With entrepreneurship, you need to be ready to fail a lot because it’s the only way you are going to grow. I’m not talking about catastrophic failures in which your business shuts down. You need to be ready for things NOT to work and you need to keep going. It’s going to happen a lot, added Walters, author of the forthcoming book The Personal CFO.

Can entrepreneurship be taught?

According to Glomski, “Some people are born with entrepreneurial DNA, but I believe it is a learnable skill set. In writing my book and in my existing capacity I'm fortunate to be around some incredibly successful entrepreneurs. There are some commonalities amongst all of them—most are voracious readers and lifelong learners. More than half seem to have read Think and Grow Rich by Napoleon Hill.”

Glomski said he began his career on typical Big Four corporate path at age 22 and was miserable by age 22-1/2. “One day I was assigned to go review the financials of the Stone Foundation. I assumed they sold rocks or something. It turned out to be about a completely self-made guy who had amassed an enormous net worth and founded a Fortune 500 Company. I went to our administrative assistant and asked her, ‘how did he do this?’  She replied: ‘He wrote a book about it...Take a copy.’

I read the book and it forever altered my life and who I work for (entrepreneurs). The book was Success Through A Positive Mental Attitude. It was authored by W Clement Stone and Napoleon Hill. Thirty days later I quit the firm and never looked back. So if I could offer one piece of advice, read Napoleon Hill’s Think & Grow Rich.

According to Christian, today’s students graduate with a more entrepreneurial outlook than prior generations because they know their first job will be a short layover on their career flight—not their ultimate destination. “Having more open-mindedness and flexibility to risk job changes is healthy overall, but must be balanced with dedication to the job you are currently doing,” said Christian. “Geographic flexibility, including foreign assignments, also allows for a stronger resume and life experiences,” he added.

Are younger people more reluctant to fail?

“I don’t know if it’s one generation versus another,” noted Walters, “but there’s definitely more pressure than ever on people entering professional careers NOT to make mistakes--not having a dreaded ‘ding’ on your record. That’s completely the opposite of entrepreneurship where you are figuring things out all on your own. Mistakes are all part of the learning curve. If you have family and peers who have all built a narrative around you based on success, then the self-imposed pressure to be perfect can be higher.”

Many of the experts we consulted for this post stressed the importance of reading and lifelong learning. HCVT’s Christian said writing skills and math skills “continue to be deficient” in the young people he comes across.  “I strongly suggest that every college student take bookkeeping (QuickBooks) class and a business writing course in order to be more ready for the real world.” 
According to Walters, very little of being an entrepreneur is about success or being perfect. “The person who can fail forward over and over and over again is the one who’s going to win. You need to be ready to ‘fail successfully’ and not let it discourage you and realize it’s all part of the process to growth, observed Walters.


Most of you on this distribution list have been entrepreneurs at one point or another in life. Michelle Galligan, Managing Director of Columbus, Ohio-based accounting and consulting company,
ViaVero, said that being an entrepreneur is an integration of work and life. “When you really love what you do every day, it makes it so much easier to put in all the time and effort that it takes to run a business. I don’t dread Mondays and I don’t count the days and minutes until the weekend.”
Our Take: If you can make a living with Galligan’s outlook on work and life, you are well on your way to success.

*** Take our Insta-Poll and see how you stack up to your peers.

TAGS: Anthony Glomski, Liquidity & You, Blake Christian, The Benefits of Becoming a CPA Preneur, Kyle Walters, The Personal CFO, Michelle Galligan, ViaVero

Friday, April 20, 2018

How About Some Good News for a Change

“If it bleeds it leads!”

That was the motto in the newsroom of the ABC-TV affiliate in Harrisburg, PA where I started my career. Fresh out of college, I remember those bleary eyed mornings, 5:30 am, just developing a taste for very bad office coffee. My job was to call every hospital emergency room, police precinct and ambulance dispatcher in central Pennsylvania to find out if there was any overnight carnage in the area.

How about something from sports or scientific breakthroughs I once suggested to our chain-smoking, managing editor. “That ain’t want the audience wants” he growled between hacking coughs. Research confirms he was right. According to author and entrepreneur, Rolf Dobelli, News is bad for you – and giving up reading it will make you happier.  Entrepreneur emeritus Peter Diamandis said it’s all about understanding ourNegativity Bias.”

With a revolving door White House, Facebook privacy breaches, FBI leaks, mass shootings at schools, and tensions flaring from the Middle East to the Korean peninsula, we’re up to our eyeballs in negativity from the conventional media and social media.

However, every once in a while some positive news tops the headlines. This week it happened not once, but twice. In both cases, female heroes were cited for doing their jobs extremely well under supremely difficult circumstances—and we’re not talking about coming forward to report workplace harassment.

On Monday, lightly regarded 34 year-old distance runner, Desiree Linden, become the first American woman to win the Boston Marathon in 33 years. Linden overcome bone-chilling Nor’ Easter weather conditions and an unplanned sportsmanship break 45 minutes into the race, while waiting for Shalane Flanagan, a teammate and pre-race favorite, to take an emergency bathroom break. Together they chased down the lead pack and Linden, somehow found an extra gear in the final slippery miles, cruising uncontested to break the finishing tape.

"It's supposed to be hard," Linden told reporters after her victory, shivering with a laurel wreath atop her head. "It's good to get it done."

On Tuesday, Southwest Airlines pilot, Tammie Jo Shults, calmly made an emergency landing in Philadelphia after the engine on Shults’s New York-to-Dallas bound plane exploded shortly after takeoff, spraying shrapnel into the aircraft. If that wasn’t bad enough, the explosion caused a window to be blown out and left a female passenger dead after she was partially sucked out of broken plane window for several minutes and hit by the flying debris.
The plane plummeted from 31,000 to 10,000 feet in just five minutes as panicked passengers texted their final goodbyes to loved ones while struggling to bring the ejected woman back into the plane. Despite the havoc in the passenger area, Shults kept her calm in the cockpit. She found an alternative landing strip, made a smooth emergency landing in Philly and got everyone safely to the tarmac with only one fatality and a few injuries.

Several of you shared comments with me in the aftermath. “The coordination and calm is astounding!” remarked Donna Vislocky, head of Dunedin, Florida-based DV Media and a former award-winning network news producer. “It’s just incredible what all these people
do!” Stuart Sessions, who runs an environmental consulting firm near Washington, DC said “Wow! How great to hear everyone doing their jobs wonderfully when it counts the most.”  Recollecting the movie about Sully, Sessions said, “I hope she gets the credit she deserves without the second guessing.”

In a joint statement made with First Officer Darren Ellisor Wednesday, Schults said:  "As Captain and First Officer of the Crew of five who worked to serve our Customers aboard Flight 1380 yesterday, we all feel we were simply doing our jobs."

Trust us, Stuart, she won’t be second-guessed. Listen to the actual control tower transcript.


Do yourself a favor. Turn off the news every so often and just take a look at the world around you. Everyday people are doing remarkable things each and every day. Their acts generally don’t grab the headlines or boost the ratings, but they make the world a much better place than the pundits, news media and tweeting heads of state would like you to believe.

TAGS: Tammi Jo Schults, Desiree Linden, Peter Diamandis, Rolf Dobelli, female heroes

Friday, March 30, 2018

Common Investor Mistakes Plague Your March Madness Picks, Part 2

In Part 1 of this post, Evan Powers CFP®  author of myFinancialAnswers, observed that filling out your brackets is a lot like constructing an investment portfolio. “You’re trying to find the balance between the ‘safe’ picks (top seeds, blue-chip stocks) and the ‘upset’ picks (lower seeds, growth stocks); crafting a ‘unique’ bracket that you think can outperform your coworkers (or ‘the market); even making picks that will make us feel good when they work out well (picking our alma mater’s team, or values-based investing).

As we head into tonight’s national semifinal games (aka The Final Four) it’s clear that none of the tens of millions of people who filled out their brackets every year can consistently crack the code. Sure two of the four survivors were heavy favorites going into the tournament (#1 seed Villanova and #1 seed Kansas), another was decently respected Michigan (a #3 seed) and the fourth? Loyola of Chicago, an unheralded #11 seed which hasn’t won the tournament since 1963.

It’s so difficult to pick all 67 games correctly in this 3-week long single elimination tournament that investing icon, Warren Buffet once offered a $1 billion prize to anyone who could do it. Out of more than 10 million entrants, exactly ZERO were successful.

The old saying, “Past performance is no indicator of future results,” applies to the hardwood as much as it does to Wall Street. In fact, there are many parallels between human fallacies in finance and human biases around the annual NCAA basketball tourney. “Investing and gambling share multiple biases such as recency bias in which gamblers believe teams that did well for them in past years will continue to do well in 2018,” explained Matt Topley, a former college basketball player and currently, chief investment officer of Valley Forge, PA-based Fortis Wealth, just a long inbounds pass down the road from Villanova. “Investors believe that stocks or funds that did well recently will continue to do well going forward. They believe this even though mountains of academic research is to the contrary,” added Topley.

Topley said another common shared bias is Overconfidence.  “Who had pre-tournament favorite University of Virginia (UVA) getting knocked out of the tournament in the very first round?” asked Topley. Less than .01% according to CBS Sports, which provides automated bracket picking tools for millions of office pool players “Most pool participants have massive confidence is top-ranked teams or in their alma maters who qualify for the tournament without empirical evidence to support their case.”

is another common fallacy known to affect millions of investors and NCAA Tournament pickers, said Topley. It’s the misguided belief that “Kentucky ALWAYS gets to the Final 8” or that “Kansas can’t win the big games” so why should this year be any different? Considering that star players often don’t stay more than one or two years at the elite programs these days, anchoring based on brand name or reputation is even more dangerous today than it was during the past.

“One of my favorite investing biases is herding and oddsmakers love it when the American public stampedes over itself herding into the same bets,” quipped Topley.  “No one had top-seeded University of Virginia going out in first round, let alone getting blown out by UMBC. Vegas has been making money since 1931 because of the American public’s uncontrollable urge to follow the herd.”
Another Wall Street staple is the “Halo Effect,” explained Topley, a recent winner of the Philadelphia InquirerInfluencer in Finance” award. The Halo Effect comes into play often when investors blindly follow the recommendations or investing choices of gurus such as Bill Gross and Warren Buffet. “If Bill or Buffet said so then it has to be right—except when it isn’t.

“We tend to create Gods among men within the investment world and gamblers do the same,” noted Topley.  “It’s the same when iconic broadcaster and college basketball analyst Dick Vitale screams to the nation that Villanova will win it all….How could Dickie V be wrong? Topley suggested you read “Moneyball,” Michael Lewis’s bestseller about baseball analytics, “for proof that baseball gurus have been wrong for a century.”

Then of course there’s the fallacy of “getting back to even” a mental accounting trap that has plagued gamblers and investors alike for centuries. After losing so many bets in the first two rounds of the march madness tournaments (think a string of losing hands at the Blackjack table), “I am due for a win, so let’s double down to get back to even,” you tell yourself “In investing, as in life, holding onto your losers is an emotional death trap,” observed Topley “Investing and the NCAA bracketology are psychology games, not IQ games


Whether investing, gambling, or just wagering a sawbuck in the friendly office pool, always check your emotions at the door.
*** Take our Insta-Poll and see how you stack up to your peers.

TAGS: Matt Topley, Fortis Wealth, Busted Brackets, March Madness, Behavioral Finance, Evan Powers,

*** Take our Insta-Poll and see how you stack up to your peers.

Wednesday, March 28, 2018

Behavioral Finance Explains Why Your Brackets Are Busted

Ask 100 of your (distracted) co-workers how their NCAA basketball tournament picks are holding up and 98 will tell you they got “blown up” this year thanks to all the “F’n upsets!” The other two are probably lying.

How can that be? Two of the Final Four teams are #1 seeds (Villanova and Kansas) and the third is well-regarded University of Michigan, a #3 seed. Okay, not many of them foresaw unheralded Loyola of Chicago (a #11 seed) surviving into the final weekend of the tournament—only the fourth time in history a #11 has done so well. But, other perennial “blue chips” teams like Duke, Purdue, Syracuse and Florida State had deep runs through the March Madness gauntlet.

So, why all the bellyaching about upsets?

“The process of filling out an NCAA Basketball Tournament bracket is ultimately like constructing an investment portfolio,” Evan  Powers CFP®  observed in myFinancialAnswers. “You’re trying to find the right balance between the ‘safe’ picks (top seeds, blue-chip stocks) and the ‘upset’ picks (lower seeds, growth stocks); crafting a ‘unique’ bracket that you think can outperform your coworkers (or ‘the market); even making picks that will make us feel good when they work out well (picking our alma mater’s team, or values-based investing).

As the old saying goes: “Past performance is no guarantee of future results.” For example, Powers’ alma mater, University of Virginia, was the #1 overall favorite in this year’s tournament. How’d they do? Despite being 20-point favorites over their first round opponent, University of Maryland, Baltimore County (UMBC), Virginia didn’t just lose to the 16ht-seeded Terriers and their 5-foot-8, 140-pound guard
K.J. Maura--they got blown out by 20 points! UMBC’s Cinderella run ended abruptly in the next round, but they made history—it was the first time in tournament history that a #16 defeated a #1.

Then there’s the University of Loyola-Chicago Ramblers, lightly regarded a #11 seed, that hadn’t appeared in the NCAA tournament for over a decade. The fact that Loyola made it to the Final Four this year “befuddled all but the less one half of one percent of the more than tens of millions of ESPN bracket players who picked them to advance this deep into the annual contest,”
observed Bill Kelly, CEO of the Chartered Alternative Investment Analyst Association® (CAIA) and author of the All About Alpha blog.

It’s only the fourth time in tournament history that a #11 seed has advanced to the Final Four.

Assuming there is some information advantage here, and this group is the closest proxy to expertise, it’s no wonder that the experts sometimes look and feel very foolish,” added Kelly.

Whether investing or filling out tournament brackets, following the herd simply means following the trends. Despite a stellar year for hedge funds in 2017, Kelly said many of the big managed futures funds quite happily followed the longer-term equity trends right over the sizeable February speed bump” which is reflected in the disappointing YTD numbers. “Is this the time to lock in losses or take a pass based on a one-month composite index? If so, the investor may resemble the many NCAA bracket players who are now on the sidelines wondering how so many seemingly inferior teams have risen to dominance amid So Much March Madness,” lamented Kelly.

According to Powers, “the biggest mistake that people tend to make when filling out their brackets is picking too much “chalk”, or highly-seeded teams. People confuse the most likely individual outcomes with the most likely aggregate outcome.

With 63 games in a high-pressure single-elimination tournament, “there’s basically no way that all the top-seeded favorites will win every game,” noted Powers. “Remember, there has only been one year in history when all four #1 seeds advanced to the Final Four, as compared to three years when none of the top four did. That’s not a bug, it’s a feature,” added Powers.

No wonder Warren Buffett didn’t break a sweat when he once offered a $1 billion prize to anyone who could pick a “perfect bracket.” He knew it was mathematically impossible to do so. He also knew that America’s predilection toward picking the favorites would cost them dearly and actually make it even more unlikely that they would pick the perfect bracket. Did anyone beat the odds? Heck no. Not a single one of the tens of millions of players who participated in the contest survived the first weekend of the tournament with their brackets intact.

In the same way, constructing a portfolio comprised only of blue-chip stocks is probably a bad idea, explained Powers. In a 2014 analysis, the biggest market cap stocks in the S&P 500 were AppleExxonMobilMicrosoftGoogleJohnson & Johnson. “While a portfolio consisting only of those 5 names (in equal weights) would have earned a solid total return of 14.8% in 2014 (aided mostly by Apple, which clocked a 40.6% return; 2 of the 5 actually would have lost money), their performance was barely distinguishable from the overall market average,” said Powers.

Our Take: As in the March Madness tournament, anyone can be a winner on any given day.

The human mind is dominated by biases. “I have a sports bias towards basketball,” admits our client, Matt Topley, chief investment officer of Fortis Wealth and a former college basketball player and youth basketball coach. “It is so exciting to watch this sport because you are right on top of the action with no players covered in pads or masks.”  Topley hopes the NCAA never changes the single elimination “one and done” format of the annual tournament bringing together 68 of the nation’s top college basketball team.  “This opens up every tourney to a David vs. Goliath story like no other sport, each year a melodrama plays out before millions of Americans where an unknown team rises from obscurity to greatness.”
It’s like when a scrappy, thinly-traded IPO (think Loyola or UMBC) outperforms an S&P 100 global behemoth (think Virginia, Miami or Tennessee)—in the same industry. 


In Part 2 of this post, Topley will explain how the most common psychological mistakes made by investors are also made by the millions who fill out their NCAA tournament brackets every March. Hint: “It’s a psychology game, not an IQ game,” Topley told me recently. Amen to that—and to Sister Jean!

TAGS: Matt Topley, Fortis Wealth, Busted Brackets, March Madness, Behavioral Finance, Evan Powers, Bill Kelly, All About Alpha blog