Investment Insights - Ready, Set, Hike!

• Portfolio construction requires a healthy degree of diversification, just as a football team needs to play both sides of the ball.

  
  

• Success on the field needs to take field conditions, coaching, and clock management into consideration.

  
  

• Market conditions go through up and down cycles, just as NFL franchises do.

Football season is in full swing. With the leaves falling, it is one Tom's favorite times of the year. Tom’s Chicago Bears have been lagging in a competitive NFC North Division, whereas Vince’s Cleveland Browns are sadly disappointing (yet again...). Ironically, we see many common similarities between assembling a football roster and investment portfolio construction, and we love providing our investment insights. We believe a successful team requires a well rounded roster of on both sides of the ball; strong game management and leadership while also recognizing that players go through ups and downs.

Playing Both Sides of the Ball

A properly constructed portfolio requires certain parts of the portfolio to play their unique role in their portfolio. Whether it be offense for generating wealth, defense for protecting wealth, or special teams for unique situations - each side of the ball has their role.

Offense

Offense tends to get most recognition as they are often the ones that make the banner plays! Whether it be your speedy wide receivers, a scrambling quarterback, or a powerful running back, the offense’s primary goal is to score the touchdowns. Yet, a team dominated with ball carriers alone will not be competitive because the often neglected offensive line plays a critical role in moving the pigskin down the field.

We view offense as equities (otherwise known as stocks) in a diversified portfolio, which necessary to grow wealth and purchasing power over time. However, different types of equities need to be represented in the portfolio. Wide receivers, quarterbacks, and running backs are your fast-moving players. This is similar to the higher-beta stocks, whereas the offensive line is your slow-moving base - such as dividend paying stocks.

Defense

Defense is necessary to win championships with the role of protecting the lead that the offense hopefully put on the scoreboard. In doing so, it is not necessary for defense to score points (although everyone loves a safety or a pick-six), as opposed to ensuring the opposing team doesn’t score against them.

In portfolio construction, defense generally tends to represent fixed income - otherwise known as bonds. Just as there are several types of defenders - such as linebackers, safeties, and defensive linemen - there are a variety of fixed income asset classes - such as treasury bonds, municipal bonds, and corporate bonds - that deserve a role in your portfolio to preserve wealth while also generating income.

Special Teams

Special Teams players do not enter the gridiron often, but when they do it tends to be in unique scenarios when the pressure is on - such as a game winning field goal. Special Teams players range from punt returners, to long snappers and the place kicker.

A robust portfolio should not only focus on their offense (equities) and defense (fixed income), but also other diversifying asset classes (the special teams). These asset classes include but are not limited to commodities, real estate, and private investments.

Game Management

Field Conditions

As one of the only sports that plays in basically any weather condition, a great football team needs to be willing to win in any type of field condition. Adverse field conditions may include sleet, 40mph winds, mud, or anything else Mother Nature presents on the field!

Investment portfolios need to be resilient for various types of environments including inflation, recession, stagflation or reflation. Concentrating your portfolio to perform in just one economic scenario will likely yield subpar results. Importantly, the economy is not static and the macro-landscape can change fast under certain circumstances, making diversification and portfolio re-balancing critical.

Coaching

A winning football team not only needs a well rounded roster but also superior coaching. Often times, coaches do not act in the best interest of their team but instead for their personal ego. A common flaw in coaching is overconfidence in decision making. For instance, a coach may attempt to convert a first down when it is fourth down and long, or to sneak an on-side kick with the unlikely chance the opposing team will recover the football. In investing, the overconfidence bias is defined as:

We believe that mitigating overconfidence bias can be achieved by setting realistic expectations, continuous education, self-awareness, tempering emotion, and recognizing when luck plays a role in your portfolio. At RISE, we seek to mitigate overconfidence biases in the construction of your portfolio.

Clock Management

Often-times, the clock is either your best friend or worst enemy of the football field. Understanding when the clock is in your favor can play a critical role in your game plan. Many would remember the recent Super Bowl LI between the New England Patriots and the Atlanta Falcons.  The Atlanta Falcons played exceptionally well up until the end of the 3rd quarter, commanding a 28-3 lead with 2:12 left on the clock in the 3rd quarter. However, New England staged a historic comeback in the 4th quarter to tie the game, and they eventually won in an overtime thriller.

In investment portfolio management, knowing when to play defense is critical to achieve a long-term win. Disciplined portfolio re-balancing of trimming your winners and bolstering defensive exposure prevents the likelihood of losing scenarios like the Falcons incurred in 2017 against Tom Brady’s Patriots. We see a critical need in portfolio re-balancing in many of the portfolios we analyze for our clients.

Seasonality (Patriots)

Football teams go in and out of favor season by season. For instance, the New England Patriots dominated the NFL with the turn of the century winning 6 Super Bowls under the Bill Belichick era. However, since Super Bowl LIII, the Patriots have performed below expectations. In 2023, their record was 4-13 and as of this writing, their 2024 record is 2-7.

Investors need to be keenly aware that certain investment styles and trends go in and out of favor. For instance, the largest market capitalization companies at the end of each decade tend to be underperformers the following decades.

• 1980’s: Energy Equities

• 1990: Japanese Equities

• 2000: U.S. Technology Equities

• 2010: China & China Related Commodity Equities

• 2020: U.S. Technology Equities

Popular investment themes tend to result in overvaluation and unrealistic expectations, leading to future long-term underperformance. At RISE, we do not believe that dominance lasts forever, whether it be on the gridiron or in your portfolio, emphasizing the need for re-balancing and diversification.

Companies With the Largest Market Cap After Each Decade

and Their Subsequent 10-Yr Returns

Conclusion

Portfolio construction and football have more commonalities than one may think. As your coach, we remain committed to managing your portfolios to account for all potential outcomes, emphasizing diversification and a goals based approach.