Ayrton Senna is a legend in the rarefied world of Formula One (F1) racing.
He won three world championships before a fatal crash took his life all too early. Now he is regarded as one of the greatest drivers of all time and practically messianic in his native country Brazil. We don't care what anyone says, in our book, he is the best — better than Schumacher, Prost and Clark.
You doubt us?
Consider his first lap at the 1993 European Grand Prix held at Donington Park. It is perhaps the greatest lap in F1 racing history where Senna starts from the forth position on the grid, drops to fifth place after a bad start, but then unbelievably passes four cars to take the lead well before the lap was even over. And this was all done in torrential rain! See the brilliance here.
It was the third race of the 1993 season, and Senna was in a relatively new and still unfamiliar race car (recall his team, Marlboro McLaren, switched to Ford V8 engines in the beginning of 1993 after Honda decided to discontinue its race engine pursuits). But on that magical day at Donington, like any other race day, Senna had a plan and executed it brilliantly in the midst of adversity. Despite his anger at starting in the fourth position and the unrelenting rain, Senna and his pit crew had a specific race plan that helped to determine a good outcome: an aggressive racing line for the corner apexes, proper turn braking and exiting points, pitstop utilization timing, fuel consumption planning, tire selection for track conditions, suspension tuning for optimal handling, etc.
Long-term wealth planning is a lot like Formula One racing.
Think of asset allocation and investment selection as the racecar. Believe it or not, in F1 racing all of the cars are designed and developed under the same aerodynamic rules, that is why they all look the same on the surface. Underneath, the cars are dialed in and tuned (suspension, alignment, tire selection, etc.) to fit the driver and give him or her the best chance of winning.
Same for wealth planning. Each person uses the same asset allocation tools (equities, fixed income and cash) but different "tuning" (the mix of those tools) that is supposed to get him or her to the wealth planning finish line with the smoothest ride possible (a.k.a. the required rate of return to make the plan successful with the lowest amount of volatility).
Similar to Senna sticking to his Donington race plan despite the adversity, investors need to stick to their long-term wealth plan when markets get frothy (like now). Know that normal market declines, on average, show up with the following frequency based on our analysis of peak-to-trough declines over the last 100 years of the S&P 500 Index:
• 5% declines = About three times a year
• 10% declines = About once a year
• 20% declines = About once every four years
A good plan helps limit the emotional reaction to market declines, because its proscribed asset allocation for success already considers normal market declines. A deviation from the plan at the wrong time can result in a permanent loss of capital and not finishing the race.
Contact Russell Moenich to learn more about this topic.
330.255.4330 | firstname.lastname@example.org