The future is always uncertain, no matter how much we agree on what may come next. A recent example of this is the Duke and North Carolina basketball game on February 20th. This much-anticipated event drew significant attention. Tickets were selling at prices similar to the NFL Championship game. The packed crowd included big name celebrities, athletes and even President Obama. Everyone wanted to see what was expected to be a memorable chapter in the storied rivalry between two legendary programs. Duke came into the game ranked #1 in the nation, a result in part of the outstanding play of their four elite freshman, one of their most talented and celebrated being Zion Williamson. Everyone agreed that Duke would not only defeat their longtime rivals, but they would win big.
The certainty around the game faded shortly after tipoff. Thirty-five seconds into the game, Williamson took an awkward step, causing his shoe to completely break apart and twisting his knee. I don’t blame the shoe—at 6 feet, 7 inches, 285 pounds, and with a jump reach of well over 40 inches, Williamson is one of the most explosive athletes in all of sports. He was unable to return to the game, and Duke never recovered. North Carolina went on to win by 16 points.
So, what does this have to do with finance? Well, as I mentioned earlier, the future is always uncertain. The factors we use to make assumptions about the future are almost always subject to random and extreme changes. Uncertainty is why we, as financial advisors, encourage risk management principles such as planning for margin in spending plans, building emergency reserves and diversifying investments.
There was another bet impacted by the first minute of the Duke game. Before Williamson’s injury, he was a favorite to be the #1 pick in the next NBA draft. In fact, he had -2000 odds. That means you’d have to bet $20 to win $1! When you bet on the consensus, you often have to accept a lower payout, but the risks still remain. This is true with markets as well. Betting with the crowd is often the low-return option over time. Be mindful of crowded investments with lots of hype. They tend to carry the same risk as other investments, but with less return potential.
There is no such thing as a sure thing, and the real risks are the ones you can’t envision. Invest well, and plan accordingly.
Any opinions are those of Brian Cochran and not necessarily those of Raymond James.