With March Madness now wrapped up, this year’s tournament saw no shortage of upsets. In listening to commentators breakdown these upsets, one couldn’t help but notice how many highlighted poor free throw shooting, especially in the games’ closing moments, as the key factor in determining a team’s success or failure.
What causes a player who historically converts 80-90% of his free throws to transform into someone unable to hit the broad side of a barn? The answer is simple – emotion. And what do the world’s greatest athletes do to prepare and combat the effects of emotion during such moments? They look to process.
We’ve seen the importance of routine time and time again on television. A player steps to the line, receives the basketball from the referee, flips it in the air or rolls it across their fingers, bounces it once, twice, maybe three times, takes a breath, looks at the rim, releases the ball and holds their pose until it makes contact with the basket.
While the above routine will vary depending on the player, the fact remains the most effective shooters do not simply hope for the desired outcome during times of immense pressure. Instead, he or she is able to fall back on the tried and tested routine they’ve perfected over decades of practice and countless hours in the gym.
The same lessons apply to the disciplined investor. The market volatility we experienced earlier this year can be compared to what the visiting team might experience at the free throw line. The financial media are the countless fans creating white noise and chaos in the background, begging us to lose our focus and ditch the routine we have practiced with discipline, courage, and conviction.
The component parts of our investment routine are no different. The investment policy statement, rebalancing, annual review of family goals and liquidity needs, and consistent communication during both good and bad markets all prepare us to navigate through a chaotic market during times of pressure and stress.
While times of market volatility are never easy and impossible to ignore, remember the routine we’ve developed together – one backed by decades of academic research and empirical evidence of Nobel Prize winning laureates1. So next time we find ourselves in the midst of a volatile market, remember our routine. We keep our focus on the basket, our long-term financial goals, and take a deep breath because we are confident it can lead to a great investment experience.
As always, we appreciate your business and look forward to continuing to serve you and your interests.
1Disclosure. Eugene Fama is a Nobel laureate (2013), Board Director and Consultant to Dimensional Fund Advisors (DFA). Ken French is a Board Director and Consultant as well as Co-Chair of the Investment Policy Committee of DFA. French and Fama are not associated with TFO-TDC, LLC. However, through the use of DFA mutual funds, TFO-TDC uses investment strategies guided by French/Fama’s academic work and five-factor model. The three-factor model (1993) is a pioneering study by French/Fama which suggests that three risk factors: market (beta), size (market capitalization) and price (book/market value) dimensions explain 96% of historical equity performance. In 2014, Fama and French added two new factors to their model. The first, companies with higher future earnings will have higher stock market returns: the profitability factor. The second, stocks of companies with the high total asset growth have below average returns: an investment factor. The paper ‘A five-factor asset pricing model’ was published in the Journal of Financial Economics in April 2015.