Tending to Your Investment Garden
Spring is finally here, which means it is time for those with green thumbs to start preparing their garden for the year. Last year, my wife took up gardening and had some growing pains – no pun intended. There are a lot of parallels that can be drawn between the maintenance of a garden and tending to your investment portfolio. Let’s examine what it takes to make sure you are setting yourself up for success.
The first matter to address is what to put in your garden. A few staples of the gardening world are zucchini, cucumbers, and tomatoes. They are easy to grow and can be used in various dishes. As it pertains to investments, you will want to focus on broad indices of large-company stocks (domestic and international) and bonds. The stocks provide the growth potential while the bonds provide current income and seek to dampen volatility. Diversity is important. Much like you wouldn’t want to eat solely cucumbers the entire summer, your portfolio should have a mix of these core holdings. Do you want to broaden your horizon and add some eggplants or onions? Keep your core holdings in place and add some emerging markets or thematic investments in small amounts. Too many risky crops and you end up with unfavorable outcomes.
Anybody who has ever tried to maintain a garden knows what a pest weeds can be. Left unattended, they can choke off vital nutrients to your crops. “Buy and hold” is a strategy akin to letting your garden grow unattended. Will it still produce results? Sure, but it’s not optimal. Proper maintenance of an investment portfolio includes regular rebalances and optimizing for taxes. Rebalancing ensures that you stay in line with your appropriate risk level, and minimizing taxes prevents a common pest from eating away at your gains.
Patience is a virtue. It is natural to want to see instant progress while watching nature do its thing. We have all been guilty of squatting down to examine the soil, waiting for the first seedling to sprout. Now imagine someone who checked their garden every ten minutes for progress. It would look ridiculous. Technology has allowed us to get instant updates on our portfolios, allowing for bad habits to creep in. For instance, if you noticed your tomatoes weren’t growing fast enough, would you dig them up and move them to a different spot in the garden? Or replace them with another plant mid-season? Tinkering too much with your investments would have similar adverse effects.
If the seeds you planted represent the investments in your portfolio, the water and sunlight would be the regular contributions made to your account. A diversified mix of crop types, normal water and sun, and proper maintenance will ensure that you are setting yourself up for a bountiful harvest at the end of the season. My mother has been gardening for years, and my wife constantly asked her for advice. Talking with a financial professional can help avoid the pitfalls and point you in the right direction.
Author: David Rath, CFA
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