My husband and I watched a significant amount of the Tour de France. It turned out to be much more exciting than I initially thought, and, yes, I discovered a link between the Tour and investing.
This isn’t a typical American sport, so here are the highlights of the metaphor I’m trying to set up:
- The tour is made up of 21 races called stages.
- Some stages favor sprinters while others favor climbers.
- During each stage, most cyclists ride together in a giant group of bicycles called a peloton. The peloton allows the rides to go faster with less effort. Sometimes people break away from that group and try to win an individual stage, while others fall out and lose the aerodynamic advantage of the peloton’s pull.
- Winning a stage is significant, however, the overall leader wears the yellow jersey, accumulating the fastest time over the course of all stages.
My husband and I began watching long after the yellow jersey had a significant lead on his competition. My husband kept asking, how can the “race leader” keep hanging in the massive peloton with all of these other riders and still be winning?
For me, it was obvious: He didn’t need to win more stages – in fact trying to win each race would likely put him in danger of losing time. He simply needed to keep up with whatever pace his competition set, wait for courses that played to his strengths, and take no further risk.
As I was explaining diversified portfolios to a client this week, it occurred to me that my portfolio management perception informed how natural it seemed that the race worked as it did.
When we invest in a diversified portfolio, we ride in the peloton. We let the momentum of the diversified market drive the portfolio. We strategize to avoid crashing, attempt to stay toward the front, and push the pace when the risk is worth the reward. It’s a long-term mindset, where success has a broader definition than getting the highest return available in this year’s marketplace.
The idea of winning every stage sounds like it should be the goal. It sounds impossible to get ahead if you don’t at least win most of the stages, but over long periods of time, short bursts don’t necessarily carry you far enough. This year’s Tour de France winner only won 3 stages, yet he beat his nearest competitor by over 5 minutes, which in any race is a huge lead, including (i.e. metaphorically) portfolio management.
That’s not too shabby for a guy who spent a lot of time in the peloton. He knew his strengths, was patient, took calculated risks and in the end, he won his race, which is something we all strive to achieve.
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