As a wealth management firm, we focus on the process: your investments, your plan, and your professional advisory team. We help you and your family make smart decisions about your wealth to help mitigate taxes, take care of your heirs, protect your assets from being unfairly taken due to divorce or litigation, and if you are inclined, magnify your charitable gifts.
When you receive your monthly statements from Fidelity, have your quarterly reviews from us, or go online to our portal to monitor your accounts, you may see a series of investments with esoteric names: iShares Core S&P Total US Stock Market ETF (symbol ITOT) or DFA Intermediate Muni Bond Institutional. These are either Exchange-traded funds (ETFs) or mutual funds (a way to own a broad spectrum of equities or fixed income—stocks or bonds). But what these ETFs or funds own has become a question that we are receiving more often, especially with the media trumpeting Apple, Amazon, Bitcoin, DoorDash, and other newsworthy high-flying companies.
Eating breakfast, I was looking at the label of my Greek yogurt. As a diabetic, I am very conscious of the carbs in everything I eat—carbs will move my blood sugar and thus my need for additional insulin. But after checking out the carbs (19g), my eyes moved down to ingredients. “Grade A Pasteurized skim milk, cane sugar, black raspberries, modified cornstarch, natural flavors, citric acid, red cabbage extract…”
That got me thinking: What percentage is each ingredient? What does red cabbage do to the flavor or consistency of the yogurt (not to mention what brilliant chemist thought of putting it in the mix)? Why mix these ingredients and how did they come up with it to make this delicious yogurt?
There is an analogy to how we create the proper investment allocation for your plan. Together through your Life Map and our planning process, we discover what rate of return is required to reach your goals. Once we determine your required rate of return (how many carbs should be in the yogurt), we then pick the right ingredients. Here we are ensuring that you own companies (stocks) of varying size, industries, dividends, country of origin and fixed income (bonds) of differing quality and maturities. These stocks or bonds make up the yogurt ingredients. How we mix them determines the expected performance or volatility in the portfolio (taste and carbs).
Why own an ITOT vs. individual stocks? There is no right or wrong answer but let me explore why we favor having ITOT (or the like) in portfolios. In an ETF, you can own thousands of different companies. As companies grow to be dominant (or decline in value), they move from being a small percentage of the ETF to a larger percentage (or decline accordingly). The graphic below shows that over time, dominant companies in one age sometimes continue to dominate, but others disappear entirely. Owning an ETF makes predicting these trends unnecessary.
In his most recent annual meeting, Warren Buffet discussed all the companies which made automobiles in the United States. He focused only on those automobile companies that started with the letters “Ma” to show that although automobiles would become the dominant industry in the country for decades, most of the companies were defunct by 1930 when a handful of dominant companies remained. To be a successful investor, all you needed to do was own a basket of the great companies and they would have sorted themselves out, leaving you with GM, Ford, and other dominant companies.
List of defunct automobile manufacturers of the United States2
Of course, that is what happened in the late 1990s with the internet (remember Myspace or AOL's takeover of Time Warner?) and no doubt, will happen in our current era with Cryptocurrency, autonomous vehicles, and delivery companies (Doordash, GrubHub, Lyft, Uber).
The top companies in the world also change over time. In 1989, the top companies were based in Japan, not the US. In 2021, the largest companies in terms of market capitalization (price of the stock multiplied by the total number of shares outstanding) are predominately US, no Japanese companies even make the list (see below)3 .
When we build your customized investment portfolios, we select a wide variety of companies across geographic and industry sectors, to ensure you have exposure to all of the ingredients in the yogurt. This diversification aims to reduce risk while maximizing returns. Then we let the holdings work—producing both dividends and increased market value for you over time.
Author: Glenn Ullmann, CDFA®, CAP®
Glenn Ullmann is President of Ullmann Wealth Partners. He founded the firm in 2002 and has overall responsibility for the firm's wealth management practice. He is passionate about educating clients and helping them achieve overall financial health.