The Hare and the Tortoise is a classic Aesop Fable about an over confident hare and an unassuming tortoise who engage each other in a foot race.  The fleet-footed hare is so assured of his abilities to win the race he decides to take a nap on the race route while the lowly tortoise keeps on walking.  When the hare finally rouses from his slumber he realizes the tortoise is about to win the race and despite the hare’s best efforts to catch the tortoise he falls short and loses the race.

In the sixth grade, I wanted to run on the 4 x 100 relay team for our elementary school track team but I was an extremely slow runner.  I knew I wouldn’t make the A team so I convinced the coach to add a C team just in case all the boys on the A and B teams got hurt before the meet.  He humored me and added a third relay team.  As I got older I started running marathons.  In a marathon, the key to a successful race is to stay focused on the pace and not worry about the other runners especially during the early part of the race.  I knew If I stayed on my pace I’d eventually catch more runners just like the tortoise.

During a bull market, investors get antsy because several investments appear to be doing better than their existing holdings so they want to abandon their plan, sell their investments and buy the high fliers.

I did some research on a high flier portfolio compared to a basket of low cost, index funds and here is what I found.

This high flier portfolio generated a 1-year return of 27.5%, a 5-year return of 14.77% and a 10-year return of 5.84%.[1]  This portfolio consisted of the following active mutual funds:

CGMIX – CGM Focus

KSCOX – Kinetics Small Cap Opportunities

LMNOX – Miller Opportunity

OAKMX – Oakmark Investor

DEMIX – Delaware Emerging Markets

LSIGX – Loomis Sayles Investment Grade Fixed Income

The low-cost portfolio generated a 1-year return of 15.37%, a 5-year return of 11.57% and a 10-year return of 6.15%.[2]  This portfolio consisted of the following mutual funds:

DFEOX – DFA US Core Equity 1

DFQTX – DFA US Core Equity 2

DFSTX – DFA US Small Cap

DFIEX – DFA International Core Equity

DFCEX – DFA Emerging Markets Core

DFIGX – DFA Intermediate Government Fund

In the end, the low-cost portfolio caught and passed the high-flying portfolio.  The high-flying portfolio was also weighed down with higher fees.  The weighted average fee for the active portfolio is 1.12% while the fee for the low-cost portfolio is .28%.

The urge to abandon your long-term plan and chase short term gains may be high but I caution you to employ this tactic.   Your financial plan coupled with a low cost, balanced portfolio will help you create generational wealth.

But if we hope for what we do not see, we wait for it with patience. ~ Romans 8:25 

Bill Parrott is the President and CEO of Parrott Wealth Management, LLC.   For more information on financial planning and investment management, please visit www.parrottwealth.com

September 27, 2017

Note:  Your returns may differ than those posted in this blog.  Past performance is not an indicator of future performance.

[1] Morningstar Office Hypothetical Tool.

[2] Ibid.