What F1 history teaches us about the dominating team

For the 10 seasons between 1999 and 2008, Ferrari dominated F1 and became constructors’ champions 8/10 times. Like Williams, they too haven’t been able to repeat their dominating success since. Red Bull took the lead for four years after that and Mercedes was basically unstoppable between 2014 and 2021.

In my experience, new and prospective investors share similarities with F1 predictions

They are invested in a particular type of investment, fund, asset class or currency because they believe they are investing in what was believed to be the leader in that field, with several even believing that investing all of their capital in it is perfectly justified. If an investor had to invest their capital in one team in 1998 with a 20-year time horizon, I assure you that few F1 experts would have believed then that Williams would experience the breakdown they did in the following 20 years.

Currencies have a similar history

A reserve currency is a large quantity of currency held in ‘reserve’ by monetary authorities like central banks. In the 1600s no one would have believed that the Dutch Guilder would eventually be dethroned as global reserve currency. And yet it was, by the French Franc in the 1700s. The Franc was then dethroned by the British Pound that kept its title until close to the mid-1900s. You would have had some trouble convincing investors who wanted to invest in an offshore currency as a hedge against the weakening of their home currency, that the British Pound was not the place. In 1940 it still made up nearly 70% of the world’s foreign exchange reserves, while the US Dollar moved from zero in 1900 to almost 28%. The rest, as they say, is history, as the US Dollar managed to move to above 70% in 2000.

And so, does markets    

For several good reasons, the US Stock market (S&P 500) delivered a return of nearly 400% (or 17% per year) between 31 May 1990 and 31 May 2000. Again, you would have convinced very few investors that the S&P 500 would ever be dethroned as the no.1 investment destination. Much like now, the geopolitical environment eventually turned sour and the US had to change their quantitative easing to tightening, and started raising interest rates. Companies started to struggle and share prices followed suit. Not only did the S&P 500 struggle in the following 10 years (31 May 2000 – 31 May 2010), but delivered a negative total return of 8% for the entire 10-year period.

Graph: S&P500 Total Return since May 1990

Source: Refinitiv Eikon & PSG Wealth Old Oak

Like Red Bull, however, the S&P 500 managed to make a comeback since May 2010 and with 450% accumulated growth so far (ending 31 December 2021), no one wants to believe that the S&P 500 could be dethroned. Not even in this new tougher market environment. I’m not saying that the US Dollar or the S&P 500 should be seen as the new Williams F1 racing team. What I want to point out is the importance of diversification and how it can protect you when the dominating team stops dominating.

Winning F1 drivers also have winning teams behind them

While much of the glory goes to the driver within F1, it is in fact a team sport. We remind you that by empowering your financial adviser with all detail of your goals and holistic portfolio, he/she can navigate the route better, know the conditions including the risks. It’s all part of preparing for your ‘race day’.