| 09 July 2010
On the Fourth of July, if you attended a fireworks display or watched one on television, you probably heard the 1812 Overture. I’ve never understood how a piece of music written by a Russian composer to commemorate the Franco-Prussian War of 1812 (not the war fought in this country) has become a performance standard for July Fourth celebrations across the country. Whether it’s the Knoxville Symphony or the Boston Pops, you more than likely heard the strains of that famous tune along with some booming cannons or fireworks this year.
As a cellist for almost 25 years, I’ve had the privilege of performing Tchaikovsky’s piece many times. Although most listeners love the most widely recognized last two minutes of the piece with its fanfare and circumstance, the beginning of the piece is by far my favorite. The 1812 Overture begins with a cello solo accompanied by three other cello parts. The slow melodic passages are quite beautiful and the lead solo part is a standard for cellists around the globe. After the first few minutes of the piece, the cellos fade back into a supporting role, as new themes are introduced by the woodwinds, violins, and eventually the brass.
The cello is the star at the beginning of the work, but then plays a vital and sometimes unassuming part in ensuring the success of the entire piece of music. That instrument, along with many others, makes up a symphony of sound and movement that makes the Overture a powerful piece. The conductor ensures that each individual musician works in concert to create beautiful music and see the music through to the end. What if the cellos only played the opening theme and dropped out? Even though they aren’t featured at the end of the piece, that instrument plays an important role in creating the music that Tchaikovsky wrote.
The same can be applied to your investment portfolio. When you enroll in your 401(k), make your IRA contribution or roll over a CD at the bank, that’s your focus. That’s the cello solo. But what happens after those first few bars? How does the CD work with your retirement accounts to help you move towards or enjoy retirement? The focus is on what is in front of us (i.e. the value of a certain stock price today) rather than how that investment will help you achieve long-term harmony. The assortment of investments that you accumulate through time often lacks a unified purpose to help you along the way. There is no music score or plan to make sure your assets are performing like they should. Each of those instruments should play a vital role in helping you reach your financial goals.
Further, an orchestra without a skilled conductor has difficulties in playing the score. The Boston Pops isn’t nearly as inspiring without Keith Lockhart on the podium. Without a trusted financial conductor, one with an independent mind, it’s much harder to get your financial instruments to work together to help you complete your financial goals. Each of your assets could be playing a different tune, or collecting dust in an instrument case in your attic. We’ve mentioned before the problems associated with financial clutter and lacking purpose in your investment plan. The past few weeks in the equity markets have reminded us of the volatility we saw in late 2008. To be successful, each of your instruments must be aligned with your overall financial goals. Apathy is not an effective investment strategy. You must understand how much risk you’re taking with your investments and how that relates to what you’re trying to accomplish. An independent adviser can help you develop a financial roadmap that can turn your collection of securities into a purpose-built portfolio.
In the music world, the string quartet is made up of two violins, a viola and a cello. Beethoven, Schubert and Dvorak composed many masterpieces for this ensemble. It’s very rare that you’d find a part written for a tuba in a string quartet. It doesn’t fit and creates cacophony and discord to the ear. Yet many investors have securities in the overall portfolio that don’t fit. The “tuba” in your quartet might be an investment with too much risk that doesn’t harmonize with the rest of your financial plan. You also might have other instruments (in this case, assets) that don’t fit in their portfolio because they don’t have an adequate purpose to be there. In our next essay, we’ll address asset allocation and how your different instruments in your personal financial orchestra impact your financial goals. Understanding how your assets are allocated is essential to your long-term harmony.
For example, a retiree’s portfolio may have 20 percent invested in the equities market to help protect their portfolio from inflation. How that 20 percent is invested is extremely important. Owning only shares of your old company stock, or investing in a highly concentrated portfolio of a few blue chip stocks can be riskier than having a diversified mutual fund portfolio that may hold thousands of securities. The risk creates the discord and can prevent you from meeting your goals. Owning an annuity or packaged product also can create undue cacophony in your financial life. Short-term focus coupled with the absence of a long-term plan makes you let down your guard and accumulate things that may provide safety from market conditions but at a great cost to you, with a commission to the salesperson who recommends it.
Gustav Mahler once said, “The art of conducting lies in transitions.” Whether you’ve just played the first downbeat of your financial overture or you’re finishing up the last movement of your personal symphonic work, you need a trusted financial conductor to create a strategy and ensure that all of your instruments perform together in harmony to see you through to the end.
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