Rowing is a sport of endurance, synchronization, and faith. There are numerous regattas, but I prefer watching the large boats with eight rowers and a coxswain. For the crew of a boat to be successful they must row as one. Their blades need to enter and exit the water at the same time to the cadence of the coxswain.
Rowers sit with their backs to the finish line, oblivious to obstacles, while faithfully following the instructions of the coxswain. A team of eight will have different roles in the boat. The “stroke” sits near the front, or stern, and sets the pace for the others. The power seats, three through six, drive the boat. This is the engine and these seats are usually assigned to the biggest, strongest rowers in the crew.
In addition to moving the blades through the water one instruction from the coxswain is to “let it run.” This is the instruction given to the rowers to lift their oars from the water and let the boat glide through the finish line. The crew does nothing but let the boat cut through the water.
Asset allocation has several similarities to rowing. The rowers in the boat sit in different seats with separate functions but they work together to move the boat forward. Asset allocation works well because an investor owns different investments spread out across the globe. Even though the investments differ by type, size and location, they’re working as one for the benefit of the investor.
In a famous study by Gary P. Brinson, L. Randolph Hood, and Gilbert L. Beebower the authors found that asset allocation accounts for 93.6% of an investor’s return. The remaining 6.4% can be attributed to market timing and security selection.[1] For example, if you invested 100% of your money in the Vanguard S&P 500 Fund you made 21.77% in 2017. If you invested the same amount in the Vanguard Total Bond Fund, you earned 3.57%. How you allocate your assets matters.
Here are a few more ways investing is like rowing.
Plan. To be successful it’s imperative for the crew to have a plan. A lot of strategy is needed in a 2,000-meter race. An individual, too, needs a plan to be successful. A strategy to guide you from school, to work, to retirement is paramount if you want to retire on your terms.
Faith. The rowers in the boat have their back to the finish line and are oblivious to the obstacles. The coxswain must steer the boat, set the pace, and avoid the obstacles. The rowers put their faith in their coxswain to deliver them to the finish line. A Certified Financial Planner® functions like a coxswain. He guides his clients to the finish while avoiding obstacles. He’ll set the pace through the asset allocation and investment selection based on the client’s financial plan.
Dollar Cost Averaging. The blades of the oars move through the water at a measured pace. The constant motion of the blades entering and leaving the water is what propels the boat forward. Dollar cost averaging is the constant investing of the same amount, monthly. For example, a $1,000 monthly investment in the Dimensional Micro-Cap Stock fund starting on January 1, 1982 is now worth $5.5 million![2] The automatic investing is what drove your assets forward.
Patience. After your investments are set, do nothing. A buy and hold strategy is often the best way to create long-term wealth. Fight the urge to trade often or tinker with your portfolio. If your portfolio is set up correctly and it’s based on your financial goals, it should treat you well. Remember the coxswain’s command to “let it run.”
As you move through 2018 follow your plan, invest often, and diversify your assets. Over time, this strategy will thrust you closer to your investment goals.
“All were merged into one smoothly working machine; they were, in fact, a poem of motion, a symphony of swinging blades.” ~ Daniel James Brown, The Boys in the Boat.
When He got into the boat, His disciples followed Him. ~ Matthew 8:23.
Bill Parrott is the President and CEO of Parrott Wealth Management an independent, fee-only, fiduciary financial planning and investment management firm in Austin, TX. For more information please visit www.parrottwealth.com.
January 25, 2018
Note: Past performance is not a guarantee of future returns. Your returns may differ than those posted in this blog and investments aren’t guaranteed.
[1] https://www.jstor.org/stable/4478947, Vol. 42, No. 4 (Jul. – Aug., 1986), pp. 39-44, website accessed 1/21/18
[2] Morningstar Office Hypothetical Tool, DFA Micro Cap Stock Fund, January 1, 1982 – December 31, 2017.