The Yellow Jersey

I recently had a discussion about investing with a relative of mine. He is very well educated and has taken the time to learn about different investment strategies in his quest for market beating returns. He is most definately a hare investor and we have had many battles about the best approach concerning investing.

During this last discussion he said to me that any strategy worth it's salt should be able to be the S&P 500 any given year. My response to him was that investing is like the Tour de France in that it doesn't matter who wins any given stage....all that matters is who is wearing the yellow jersey at the end.

I think my hare relative was trying to point out that the passive strategy I subscribe to did not perform as well as the S&P 500 in 2007. The S&P 500 was up 5.5% in 2007 and a 100% equity passive strategy was down -0.8% (when Madden Funds maximum fee is applied) for the same year. OK, so my hare relative has a point when it comes to 2007, but the tortoise investor should not be troubled by a down year or two or three. If each of us only got to invest for one year in our lives, I might be really worried about a passive approach, but with any luck, each of us will have many more years to invest. I am planning on investing for the next 60 years....if I am fortunate enough to make it to age 90.

If we take the long view, the S&P 500 had an annualized return of 11.0% from 1973-2007. Over the same time period a 100% equity passive strategy had an annualized return of 13.8%. Some of you might be thinking, what's the big deal about a measily 2.8% per year. Well, if you had invested $10,000 in the S&P 500 at the beginning of 1973 you would have had $385,749 by the end of 2007. If you had invested the $10,000 in the 100% equity passive strategy over the same time period, you would have had $922,527 or a measily 139% better. The power of compounding never ceases to amaze me.

For all you tortoises out there, be confident that you'll get to sport that yellow jersey over the long-run. Hares might like to poke and prod during periods that favor them, but just smile and know that this is a very long race that as a whole will favor you.