Rivers and Tributaries
The Mighty Mississippi, The Nile, The Amazon, and The Yangtze are some of the longest rivers in the world, traveling thousands of miles, moving millions of gallons of water every day; critical components to commerce as millions of people, and billions of dollars of freight go up and down the rivers.
The names of significant rivers are known to most people, but what about tributaries? Tributaries are smaller rivers flowing into larger ones, and vital to the support of the more extensive river system. The Big Muddy, Chippewa, and Watab are a few rivers flowing into the Mississippi. Without smaller rivers, bigger ones can't survive.
Open an atlas, and you’ll discover hundreds of little blue lines crisscrossing the map. These blue lines represent rivers and streams. The Rio Grande borders Texas to the south; the Red River is to the north. In between, thousands of tributaries pour into more significant rivers and the Gulf of Mexico. Some of these dry creek beds will lay dormant until the rain arrives, turning them into raging rivers.
In the investment world, the two leading indices are the Standard & Poor’s 500 and MSCI EFA. The S&P 500 includes the 500 largest companies in the United States. The MSCI EFA is the international index encompassing Europe, Australia, and Far East Asia and includes companies from 21 different countries.[1] These two indices cover the world, and most professional investors rely on them for their primary benchmarks. However, building a portfolio consisting of two broad-based indices isn’t prudent, especially ones so similar.
As small streams are essential to mighty rivers, small stocks are important to bigger ones. A globally diversified portfolio of different sized stocks and bonds will allow you to benefit from thousands of securities scattered around the world.
The past few years, small and international stocks have trailed large U.S. companies, but it won’t last forever. At some point, these sideshows will turn into the main attraction, just like small creeks turning into raging rivers. For the past three years, the S&P 500 has returned 47%, the S&P 600 Small-Cap Index 26.2%, and the MSCI EAFE International Index 19.2%. However, from 2000 to 2010, the Small-Cap Index returned 48%, and the MSCE EAFE International Index rose 30% while the S&P 500 lost 6.5%.[2]
Morningstar tracks over 83,000 global indices[3], so it’s possible to get carried away when building your portfolio. A narrow focus may limit your investment choices, too many, and your account will be overly diversified.
How many different asset classes should you include in your account? At a minimum, your portfolio should consist of large, small, and international stocks, bonds, cash, and an alternative class – so six. Of course, this number can vary dramatically depending on several factors, like your risk tolerance, assets, and time horizon. The broad categories can also include growth, value, developed, emerging, short-term, long-term, high yield, and so on.
Regardless of the number of funds, focus on owning a globally diversified portfolio of low-cost funds based on your financial goals.
If you’re not sure where to start, contact a Certified Financial Planner® who can help you navigate the treacherous waters of the financial markets.
A river is more than an amenity; it is a treasure. ~ Oliver Wendell Holmes
January 21, 2020
Bill Parrott, CFP®, CKA®, is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.
Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.