Three is Better Than Two!

Courtesy NCAA.com - Fletcher Magee, one of the top ten three point shooters of the past decade.

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It’s March and that means basketball.  This year is a bit odd in that the entire NCAA Men’s Basketball tournament is being played in Indiana and to make matters worse my alma mater, Indiana University, isn’t even in the tournament.
 
However, a record nine Big Ten teams made the final 64 so all should be ok, right?  Not exactly!
 
Either these nine teams were grossly over rated, or the Big Ten teams had the worst seedings possible or both.  Eight of the nine teams were beating in the first two rounds.  Thankfully, Michigan came back to win against LSU, and we have at least one representative of the Big Ten in the final sixteen.  Now folks that is embarrassing!
 
So, in my embarrassment, not just for the Big Ten but for my now long-suffering Hoosiers, I set to work to figure out what was wrong with Big Ten Basketball. 

​How could so many strong teams be eliminated so quickly?
 
My unscientific conclusion after watching several games was that the Big Ten lacked 3-point shooters and was too focused on the inside 2-point game.
 
Here is how the game has changed, according to Teamrankings.com, the average team shoots 37.7% from 3-point range while only 33.47% from 2-point range.  Why on earth if those stat lines are true would you ever shoot a 2-point shot again?
 
Now we know why?  If all you shot was 3-point shots defenses would adjust and cut it off completely.  However, the 3-point shot opens up the lanes and the middle of the court. This allows the centers and forwards to dominate inside at an even higher shooting average.  One works to help the other!
 
So, what does this have to do with wealth management?
 
Answer – a lot!
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We have 3-point shots in finance that have better odds than shorter 2-point shots just like in NCAA Basketball.  The clearest are the following:

1. Employer matches for retirement plans.  It amazes me how few employees take the free match from their employer(s).  I know it is easy for me to say but put up the 3%- 5% just to get the full match.  This is free money and it dramatically improves the odds of winning no matter how badly you might mess up the allocation.
2. The Proper Allocation of Assets.  Just by putting messy assets like bonds or active managers, in the tax deferred wrapper, like an IRA, you dramatically improve your odds of reaching your financial goals by giving less to your poor, broke Uncle Sam and keeping more dollars at work in your portfolio.  This to me is a layup with even higher odds, than a 3-pointer.
3. Staying invested.  Why is it the average investor underperform the market averages by so much?  According to TheBalance.com, the S&P 500 averaged 9.85% per annum for the 20 years ended December 2015.  However, the average equity investor only earned 5.19%.  Why is this?  It is because they are swayed by their emotions and do not stay invested enough.  They exit at bottoms and invest at tops.  It is hard enough for experienced investors to manage exposure to the markets.  The rule for retail investors should be to say invested or find a professional to help them!​
4. Being Diversified.  Here is a no brainer that have been destroyed during the last decade of Central Bank and government intervention, be diversified.  Why?  Simply because markets rotate and during down turns, they punish the hot areas.  Most investors (and even advisors) are not sophisticated enough to avoid those traps.  The fear of missing (FOMO) out is just too powerful an emotion!

 I am sure this is just the tip of the iceberg as far as odds go, but their what come to mind immediately!
 
Let me know if you can think of any other 3-point shots in personal finances that defy the odds!