Friends was a favorite television show of mine. Each Thursday night, I was glued to the TV to watch the eclectic mix of characters – Rachel, Phoebe, Joey, Monica, Chandler, and Ross. They made me laugh for ten years. The show worked because each character had unique and special talents. One of my favorite episodes was when Joey put on all of Chandler’s clothes while getting ready for Ross’s presentation.[1]

Friends come to us from all corners of our life. Friends from school, church, work, the neighborhood, and so on.  Depending on where we are in our life our friends enter our lives at various stations. Some are lifelong friends who see us at our best and our worst. Others are seasonal. Friends can live next door or in different towns, in different states, or distant lands. You might talk with them daily, or once a year. Regardless, a good friend is worth their weight in gold.

I have friends that I’ve known since kindergarten, others I met in junior high, high school, or college. I’ve had great work friends. Friends from mission trips and others from the states where I’ve lived.

Long-term friendships require work and patience, but it’s worth the effort. It’s challenging to maintain relationships for decades because your friends know your hot buttons. They see you on your good days and your bad ones. They’re by your side through thick and thin, celebrating your wins and consoling you in defeat. Holding stocks for a long time also takes work and patience. I’ve owned Disney, Microsoft, and Pepsi for years, and all three have caused happiness and sorrow. It’s easy to own a stock like Amazon when it’s up 17%, but how about when it’s down 94% like it was during the Tech Wreck in 2000?[2] To benefit from the upward trend in stocks, you must own them deep in the valley and at the peak.

Short-term relationships are seasonal. You might meet a friend on a mission trip or business conference. It could be a former neighbor who moved to a new state. Short-term friendships are beneficial regardless of their duration. Investments held for a limited time can enhance or protect your portfolio. Using options to generate income or protect a holding makes sense at times. Stocks can come and go, as well. You might buy a stock for a short-term trade or a seasonal trend. Stocks like Walgreens or Cisco will make occasional appearances in my portfolio, depending on their price.

And, unfortunately, some friendships turn toxic and blow up, never to return. Companies like Enron and Worldcom were friends to many during their glory days before they imploded and wiped out all their shareholder capital. For a moment in time, they were must own investments because of their meteoric returns despite their deteriorating financials.

The cast of Friends had six primary characters in front of the camera, and countless support personnel behind it. For your investment portfolio to succeed, a supporting cast is necessary. Relying on Certified Financial Planners®, attorneys, CPAs, money managers, and other professionals will pay dividends towards increasing your wealth.

Let’s review a portfolio of six different investments to see how they performed these past few years. The funds, a mix of distinct asset classes, have unique attributes designed to react differently depending on the market conditions.  The portfolio dating back to 1993 generated an average annual return of 9.63%. The portfolio’s best year was 2003, up 27.03%. The worst year was 2008, down 18.24%. This year it’s up 21.02%. During the past 16 years, it had three down years, and it rose 83% of the time.[3]

Here is the portfolio:

IVV = S&P 500 = 30%

EFA = International = 20%

TLT = Long-Term Bonds 30%

IJR = Small Caps = 10%

EEM = Emerging Markets = 5%

IYR = Real Estate = 5%

Though the portfolio performed well over the past 16 years, the returns for the individual holdings varied. For example, the small-cap, large-cap, and real estate sectors performed well over the past decade while bonds, international and emerging markets lagged. This past year, however, bonds have outperformed the other asset classes.  The leaders and laggards constantly trade the top spot, like horses in a race.

If every character of Friends were the same, the show would not have done well. The variety of actors is what made the show special. If you own similar investments, it’s not diversified, and it will not perform well over time. A diversified portfolio of low-cost funds should treat you well, like a good friend.

A friend loves at all times, and a brother is born of adversity. ~ Proverbs 17:17

December 16, 2019

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.

 

 

 

[1] https://mashable.com/article/best-friends-episodes/

[2] YCharts

[3] Morningstar Office Hypothetical – 1993 to 2019.