The Wolfpack

The wolf was eradicated from Yellowstone during the 1930s. They weren’t protected in the national park because they’re predators and, as result, there were no wolves left to maintain order. At first, there was little change to the ecosystem, but over time it changed dramatically. With one less predator to worry about, the elk taxed the park’s food chain by eating flora and fauna. Their devastation of the park led to erosion and other unintended consequences.

The campaign to reintroduce the wolf back into Yellowstone started in the 1940s by a gentleman named Adolph Murie. He wrote a report based on his study of the wolf titled: Ecology of the Coyote in the Yellowstone National Park.[1] His work started a movement to restore order in the park. It took 55 years, but the wolf finally returned to Yellowstone as 14 wolves from Canada were captured and moved to their new home.[2]  In 2016 there were 108 wolves in 11 different packs.

After the wolves became acclimated to their new home, the ecosystem started to return to normal. The elk population had been culled and they now roam the park to avoid being eaten. Their movement has allowed willows and meadows to return to their former glory. The additional growth has allowed the beaver population to flourish.  Prior to the return of the wolf, there were few beaver dens, today there are hundreds. The beaver dens have also benefited the fish in the river.[3] Yellowstone looks amazing, but it’s still evolving, and the full restoration won’t be known for decades.

Investors live in a financial ecosystem.  As the park needs the wolf to maintain order, investors need a balanced portfolio. If you remove a key component from your portfolio, it may cause long-term unintended consequences to your wealth.

Stocks are the alpha-investment for your portfolio and there’s no greater security to own if you want to create wealth. Of course, stocks are volatile, irrational and erratic. Because of this behavior, it might be difficult for investors to hold stocks through good times and bad. However, to capture long-term returns from stocks it’s necessary to employ a buy and hold strategy.

The average annual return for stocks, dating back to 1926, has been 10.2% per year. This exceptional growth rate has allowed individuals to increase their assets and outpace inflation. Inflation has averaged 2.9% for the past 91 years so failure to own stocks will erode your purchasing power.

In addition to their exceptional growth, stocks also provide an income stream through dividends. Dividends have historically accounted for about 42% of the total return.[4]

International Investments expose you to 48% of the world’s stocks domiciled outside our borders.  A global portfolio gives you access to thousands of companies with headquarters in Europe, Asia, and Latin America.  Since 1998, the U.S. has never held the top spot for the best performing stock market. The U.S. stock market gained 21% last year, underperforming 31 countries.

Bonds are desirable for income and safety. Adding them to your account will reduce your risk level and provide you security during a market stampede. During the 2008 correction, long-term U.S. bonds rose 25% and during the Tech Wreck they soared 43%. Yes, interest rates are low, and the Federal Reserve has been raising rates, but bonds are still a must own item if you want to maintain a balanced portfolio. From 1926 to 2017 bonds produced an average annual return of 5.5%.

Cash is required for liquidity. A cash position allows your other investments to grow or produce income. If the market does pullback, you can rely on your cash position to meet your short-term needs.

To maintain order, invest in a globally diverse portfolio. Stocks, bonds and cash produce an ecosystem that work in harmony for your benefit. It might not be evidently clear what happens to your portfolio when you remove one of the key components, but over time it will become obvious.

For the strength of the Pack is the Wolf, and the strength of the Wolf is the Pack.” ~ Rudyard Kipling, The Jungle Book.


August 9, 2018

Bill Parrott is the President and CEO of Parrott Wealth Management firm 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.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog. 

[1] https://en.wikipedia.org/wiki/History_of_wolves_in_Yellowstone

[2] Ibid

[3] https://www.nps.gov/yell/learn/nature/beaver.htm

[4] https://www.hartfordfunds.com/dam/en/docs/pub/whitepapers/WP106.pdf

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