4 x 100

Bill Parrott |

The 4 x 100 relay race is one of the most exciting spectacles in all sports. Four extremely fast human beings pass a baton with precision as they speed around the track. The current world record is held by Jamaica, anchored by Usain Bolt, with a blistering time of 36.84 seconds.

The collective four are faster than any one person can run the 400 meters. The world record for the men’s 400 is held by Wayde van Niekerk of South Africa with a time of 43.03 seconds, a full 6.19 seconds slower than the Jamaican relay team. Six seconds is an eternity in track in field.

When a relay team runs the 4 x 100 three quarters of the runners are standing around doing nothing as they wait for the baton. Three of the runners are idle like a plane resting on a tarmac waiting to take off.  Nevertheless, all four runners are needed at some point during the race to win and produce lightning like results.

Investors can learn a thing or two from a relay team. For example, in a diversified portfolio you may have one or two investments doing well while the remainder of your holdings are idle. For the past few years the winning trade has been growth stocks, specifically technology stocks like Amazon and Apple. Value stocks, international investments and bonds have trailed the high-flying growth sector. Does this mean you should abandon your diversification strategy and move your money to growth stocks? It does not.

As I mentioned, the relay team produced better results than the individual runner. You may get lucky by picking an occasional winner, but over time a globally diversified portfolio is tough to beat.  It’s hard to argue with the performance of Amazon’s stock price over the years. Year to date it’s up 51.99% and this follows last year’s gain of 55.96%. However, there have been periods when it has trailed the S&P 500 - hard to believe, but true.  Amazon failed to beat the index in 2016, 2014, 2011 and 2008.  During the Tech Wreck, Amazon fell 79.5% in 2000 underperforming the benchmark by 70%![1]

Berkshire Hathaway is led by the greatest investor of all-time, Warren Buffett, but it occasionally underperforms the popular index. It failed to outperform the S&P 500 in 2016, 2014, 2013, 2012 and 2010.[2]

The S&P 500 is not immune to poor performance. From 2000 to 2010 it generated an average annual return of .4% while long-term government bonds returned 7.9% per year, real-estate holdings rose 11.9%, emerging markets climbed 10.9%, and global stocks returned 2.7%.[3]

Growth stocks have been outperforming value stocks for some time, but during the month of July value stocks outperformed the growth sector.  Is the baton being passed from growth to value? Who knows. Unlike a relay team, there is no coordinated handoff between asset classes. It’s impossible to know when one category will outperform another, so the best strategy to employ is to own a globally diversified portfolio of low cost mutual funds because you never know when an asset class is going to carry the baton for the rest of your portfolio.

Remember, it’s not how you start but how you finish.

There are better starters than me but I'm a strong finisher. ~ Usain Bolt

August 7, 2018

Bill Parrott is the President and CEO of Parrott Wealth Management firm located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.

[1] Morningstar Office Hypothetical Tool

[2] Berkshire Hathaway 2017 Annual Report

[3] Dimensional Fund Advisor’s 2018 Matrix Book