Can you pick the winner in the crowd?
The world’s largest marathons may attract 30, 40 or 50 thousand runners. The Los Angeles, Chicago, New York, Boston, Berlin and London marathons attract tens of thousands of runners each and every year. The runners have different abilities and backgrounds but all have a similar goal of finishing the race. If you had to pick a winner for an upcoming marathon where would you begin? Would you ask a friend? Would you get your advice from a cable TV commentator? Would you throw a dart? Would you subscribe to a service that specializes in picking the best marathon runners? How about looking at the entrants to identify the one that looked like the best runner? Can you review past race results to isolate the winner? It is not so easy to pinpoint the one winner.
In reality, only five or six runners in the field of thousands will have a legitimate chance of winning. Does this make your job of picking the winner any easier? The elite runners will leave the field behind after the first mile and the pack will never see them again. The elite runners will finish the marathon in a little over two hours. The field may average about four hours with the back of pack finishing in six, seven or eight hours and, as always, some runners will not finish.
The top five runners in the 2015 Boston Marathon finished the race in under two hours and eleven minutes. There were 26,598 finishers in this marathon and the average finish time was 3:46:28. 15,327 runners finished better than this time, 11,271 runners fared worse and 3,653 runners did not finish. Of the initial race entrants, about 50% finished better than average and 50% finished worse than average. With this data how is it possible to pick the top finishers each and every year?
According to the Morningstar data base, there are 21,015 stocks. Is it possible to pick the best five or six stocks every year from the tens of thousands that trade? Would you be able to pick the five best? Five worst? What if you happened to pick a stock that did not finish? In 2015, there were 1,074 companies that were up more than 95% and 626 companies that were down more than 95%.
What is the best way to stay in the race so that you finish your financial marathon? I say take the field. Again, the average time from last year’s Boston Marathon was 3:46. Ask any marathon runner if they would like to finish a marathon in 3:46, most would say yes. The ideal way to take the field when you invest is to own an index fund. An index fund will give you the greatest opportunity to make money for the long haul. An index will give the investor the best chance to win the financial race. The Vanguard S&P 500 Index fund has averaged 10.64% since August of 1976. A $100,000 investment in this fund in August of 1976 is now worth $5,440,000! I would guess that most investors would be happy with these results.
As a runner in a marathon, you are competing against professional athletes, finely tuned runners, weekend warriors and first time marathoners. A runner dedicated to training for a marathon will have an enjoyable experience. An individual that did little training, not so much.
Like a marathon runner, an individual that enters the investing arena will be competing against professionals, seasoned traders, hobbyists and first time investors. If you are not ready for the competition, it would be wise to hire a financial coach or advisor to help you reach your goals.
Is it worth your time to try and find the best five companies year in and year out? A better allocation of your time might be to identity your top five financial goals and make those dreams become reality.
Do you not know that in a race all the runners run, but only one gets the prize? Run in such a way as to get the prize. 1 Corinthians 9:24
Bill Parrott is the President and CEO of Parrott Wealth Management, LLC. www. Parrottwealth.com.
Sources: Marathonguide.com, Boston Athletic Association, baa.org, Morningstar.com