As we move from summer into fall, we are reminded that trees don’t grow to the sky without transitions along the way. The same can be said of markets and portfolios. Let’s take a look at some patterns across both of these important investment landscapes.
Taking Stock in Trees
Core Anchors
The core anchors of any landscape are large, shade tree specimens. The variety will be different, depending on where you live, but in North Texas, these are our prized Oak trees. But you cannot stop there…there are multiple types of Oak trees, including my favorite, the Red Oak, and the staple you see a lot in North Texas, the Live Oak.
The Red Oak is very majestic, towering above many other varieties, and providing growth, height, and shade to our home. However, the Red Oak goes through a more severe change each Winter to our eyes by turning brilliant shades of red and yellow before finally shedding it’s leaves each Fall, and becoming bare through the Winter. Throughout the Winter, the Red Oak will conserve its energy so that it can strongly rise again during the next growth season. In the Spring, new growth appears, and the Red Oak continues it’s quest for the heavens.
The Live Oak, by contrast, sheds it’s foliage throughout the year, but never appears bear to our sight. It always has a full green canopy, even while it is shedding. But similar to the Red Oak, the Live Oak reaches for the sky and provides height, growth, and shade to our home over the years. Even though the Live Oak’s main purpose is to shade our home over time, it’s secondary achievement is to provide interest year round by staying consistently evergreen throughout all seasons.
In addition to the major sources of height and shade, there are also a multitude of smaller trees, both small shade as well as ornamental and fruit trees that provide depth and dimension to our landscapes, not to mention additional growth, albeit not to the extent of our Oaks.
At this point of the story, I know you are wondering what this has to do with investments, but you should know me well enough by now to know there is a connection. Here it is…
Diversity of Equities
The Oak trees are our Large Cap Equities, the anchors of our portfolio, and the shade to our wealth. The Red Oak resembles Large Cap Growth companies while the Live Oak looks more like the Large Cap Value series. Growth and Value are the two staples of the equity asset class. And the Large Cap choices are what they sound like: the largest publicly held companies. But Growth and Value companies also differ, just as the Red Oak differs from the Live Oak.
For the most part, Growth companies reinvest their profits back into innovating new product or service for their shareholders, thus propelling their growth in the market. The Value companies, on the other hand, tend to allocate a larger portion of their profits to payout as dividends to their shareholders throughout the year as they continue to grow their product lines and their company.
So as you can see, Large Cap Growth companies have similar traits to our beloved Red Oak, as it anchors our investments and provides growth, height, and protection in the future. Also, like the Red Oak, Growth companies tend to be more volatile and exhibit more dramatic changes throughout market cycles, but the goal is the same, and that is to grow tall and majestic over time.
The Large Cap Value companies resemble the more consistent Live Oak tree, as it continues to grow tall, but also provide year-round interest, even through the non-growth season. The Live Oak’s consistent canopy and ongoing shedding resembles the dividends that are regularly distributed by Value companies over the year.
I would be remiss without mentioning the smaller cousins to our Oak tree anchors. The small shade trees, the fruit trees, and the ornamental trees take on the role of the Small/Midcap Growth & Value in our financial landscape. They still provide growth and height, yet they are not as tall or as shading as our Large Cap series. Some smaller trees maintain their foliage year-round, while others shed during the non-growing season. They carry very similar patterns as the Large Cap Growth and Large Cap Value versions, just on a smaller scale.
Which tree type is best for your landscape? If you said "it depends", you are correct. You cannot fill your yard with only Oak trees because they will compete with each other for dominance, and none of them will reach their full potential. Without smaller trees, your lawn will have no depth. Without some evergreen, your lawn will look extremely bare in the Winter season. There are a million choices of trees for your yard when you take into consideration evergreen vs. deciduous, flowering vs. non-flowering, green vs. variegated…the specific type or color is less critical than how they are combined together for your needs. Every home has a different profile, and the landscape that fits that home the best can only be accomplished with planning, design, and situational knowledge.
Once again, the key is to select the right combination of trees (equities) that will provide the right coverage to meet your landscape goals. In other words, diversify your landscape to reach its maximum potential.
Next, we will discuss how shrubs (fixed income) play an important role to complement your tree (equity) selection.
The Interest of Shrubs
Let’s continue our conversation about landscapes. We now turn our attention to the necessity of shrubs to a landscape.
Unlike the trees, shrubs are not planted to provide height nor shade to your investment. They are meant to provide consistency and interest year-round to your home. Typically, shrubs are planted close to the home or as a hedge along a bedding area. They come in various colors, sizes, and types.
Some shrubs serve as barriers to external forces, while others cradle your home, staying low as to not overpower the beauty of your investment. Some are exotic and more fragile, while other native ones are hardiest through the harshest of Winter seasons.
Whether you choose green leaf or variegated, flowering or non-flowering, shrubs must be trimmed regularly, fed and nurtured often, and allowed to do their job. They are not exciting to watch grow, but they are necessary for the investment curb appeal to be complete all year long. Similar to our "Value" trees, the shrubs are designed to stay more consistent through all seasons, thus enhancing the overall value of our investment.
Boring yet dependable, don’t discount the value of your shrubs. Likewise, don’t discount the value that fixed income (bonds) bring to your overall portfolio over time.
Groundcover for Everyday Use
Finally, we would be remiss if we did not address the everyday need and use of groundcovers, especially grass. Grass provides both a lush and beauty to an overall landscape, and something that everyone expects for everyday uses. It cushions your steps as you traverse the yard, as well as serving as an anchor for all the landscape specimens that hold your home in place, preventing washout and loss of investment.
Similarly, cash serves a portfolio by being the “go-to” asset for everyday needs, which allows your longer term investments such as stocks and bonds to continue to grow and flourish without interruption. Cash is consistent and there when you need it, but it is not expected to grow tall or provide shade or protection to your long-term investments.
As you can see from this financial landscape analogy to your physical landscape, there are different specimens (products) depending on the overall need. The important thing to remember is that it takes a variety of different items that work together to provide the most value to your investments.
Designing a well thought out landscape is what increases the value to your home, and designing a well thought out portfolio is what increases the value of your wealth.
Happy planting!!!