Making the Band: Investing Edition

by | Oct 21, 2016 | Asset Management

When people think of the world of investing and the world of music, there are very few comparisons that come to mind.  How can stocks and bonds resemble a bass line or guitar riff?  Can an epic drum solo be compared to a new, hot IPO?  It’s safe to say those comparisons would be a bit of a reach.

However, there is one comparison that comes to mind.  When you think of the way a band comes together piece by piece, it resembles a similar process of constructing an investment portfolio.  Let’s break it down, piece by piece:

Drums:  The drummer in a band has a great deal of responsibility.  Whether recording in the studio, or performing live on stage, the drums always keep the band in time.  When the drummer is perfectly on time, it allows the rest of the band to shine and freely do their thing.  Sometimes, you might even forget the drummer is there when he or she is sitting in the back, but they’re holding it all together.  The ‘drums’ of an investment portfolio are the bonds.  No, not those crazy high-yield, low quality bonds, but the aggregate bond funds or treasury bonds.  Bonds that have the potential to be stable when the equity markets are flying all over the place.  The bonds have the potential to be a shock absorber, or cushion, in the portfolio when the more ‘flashy’ stuff might not be doing so hot.  Owning bonds may appear like you are playing it safe, but when things are going wrong while your portfolio is “up on stage”, you may be glad you owned bonds to keep everybody on time.

Bass:  The bass player in a band has almost the same ‘boring’ responsibilities as the drums.  Most of the time you forget the bass is even there, but most songs would sound weird without it.  Every once in a while, the bassist can throw a crazy riff in there, but for the most part, he or she is just keeping the rhythm.  The ‘bass’ of an investment portfolio could be some broad market index funds.  These index funds do their best to track whatever index they are assigned to (ex. S&P 500, NASDAQ, Russell 2000, etc.).  There are even a number of broad index ETF’s out there with very low costs, making it cheaper for investors to get exposure.  For the most part, these funds will quietly offer the performance (or close to it) of the index it’s tracking.  For the most part, these funds will be justdownload keeping you in time with the market ups and downs.

Guitar: Guitars are an extremely versatile instrument.  They can make an enormous variety of sounds depending on the tuning, shape, style, and strings.  If you want something soft and smooth, a jazz riff or acoustic guitar might be a good option.  If you want something grungy and heavy, an electric with the distortion pedal blasting is what you want.  There’s a million different ways to play a guitar, and even more ways to fit them into a band.  Most bands have a rhythm guitar and a lead guitar.  The rhythm guitar does what its name implies, keeps the rhythm and strums some chords.  That’s not to say the rhythm guitarist can’t rock out and have his or her time to shine.  However, the lead guitarist gets all the solos and best riffs throughout the song.

The ‘lead’ and ‘rhythm’ guitars in an investment portfolio are the equity funds.  For simplicity’s sake, let’s categorize equities as “domestic” and “international”.  It wouldn’t be fair to pin domestic or international equities as the lead all the time.  These things come in and out of favor, just like every other investment known to man.  For the sake of this analogy though, we’ll say domestic equities funds are the lead.  The equity funds offer even more rhythm and feel to the group, and provide the big solos during the bright times.  An awesome solo, or equity portion, can make or break a song.  If the guitarist hits every note and nails the solo, the song is a hit!  If the guitarist messes up and misses some notes, well, we’ve all failed at Guitar Hero before so we know what happens.

Throughout a set list, the two guitarists can take turns being the lead and rhythm.  The same goes for domestic and international equities.  Most guitar solos would not sound as powerful without a rhythm section.  The same goes for equities.  There is a place for both domestic and international in a portfolio, and learning how to ‘play both guitar parts’ will ultimately help make the portfolio more balanced.

Vocals:  Some of the best bands in the world don’t have a lead singer.  Instrumental songs can be just as beautiful as a vocally driven song.  It all depends on the timing and what feels right in the moment.  A band shouldn’t force vocals into a song if it’s not necessary.  Therefore, the ‘vocals’ portion of the band resembles a commodity portion of the portfolio.

Horrible vocals can ruin a song, but at the same time a beautiful vocal melody could turn a mediocre song into a smash hit.  The same thing goes for commodities.  When used correctly, a commodity portion of a portfolio could really add an extra spark.  However, a poorly utilized commodity trade could potentially blow up an account.  These commodities, and lead singers, tend to be temperamental, so it’s important to always keep an extremely close eye on them.

The last thing anybody wants is a lead singer getting out of control, or a commodity position destroying their account.  That’s why it always needs to be determined if vocals, or commodities, are even necessary in the song or portfolio.  If the song can get by without vocals, or the portfolio can perform without commodities, just let it be and don’t mess with it.

There are hundreds of different instruments that can be used to make amazing music, but the basics will do for now.  The same goes for investment options as well.  Every day there are new products being rolled out for investors to utilize.  Some bands don’t have drums, or guitars at all.  It all depends on what is right for the band.  The same thing goes for investors.  Whether it’s a mix of bonds, equities, index funds, commodities, or none of the above, if the portfolio makes sense for the investor based on his or her needs, that’s all that matters.

Some of these comparisons might have been a bit of a reach, but it’s always nice to make a refreshing, creative connection to the usually-confusing world of investing.  Making sure clients understand the way their portfolios operate is something not enough people in the industry make a priority.  Laying out the structure of the clients’ portfolio in terms THEY can understand, whether it’s a sports analogy, music, or something totally different, should always take precedent.  At Mullooly Asset Management, we strive to make sure our clients understand our process and how we put together our portfolios.  If you’re reading this and DON’T understand any of the investments in your current portfolio, don’t hesitate to pick up the phone and give us a call.

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