In honor of the Spring Food Issue of Fig, I thought I’d share some lessons from the kitchen that may help with your investing.
As I child I loved visiting my grandmothers. I was fortunate to have two grandmothers, the ‘fun’ one and the ‘other’ one. Many times, my fun Grandmom would bake when I was there. She made cookies, brownies and a variety of other baked goods. You can picture the scene with all the raw ingredients spread around the kitchen, and Grandmom in her apron. Right out of Norman Rockwell.
Although eating the end result was always the best part, I would often like sampling the batter along the way. Once, in fact, I remember being intrigued with this small, brown glass bottle on the table. The red and white label gave no indication to my young brain as to what was inside and so I took a long, deep gulp of the liquid.
To this day the smell of vanilla turns my stomach. It still amazes me that something that tastes so terrible on its own, can be such an integral ingredient in such delicious cookies. Go figure.
Portfolio design and more importantly asset allocation, works very much the same way. A well-designed portfolio is made of various ingredients (asset classes) that are combined in proper portions, much like a recipe, to produce the desired result. Some of these elements however, may not be appropriate on their own, much like the vanilla. Possibly you feel they are too aggressive for your risk tolerance and therefore should be avoided. Examples may include something as simple as an equity or stock mutual fund for a more conservative investor, or commodities or emerging market debt for others. These asset classes, however, may be an integral part of the recipe when used in conjunction with the other asset classes in a well-diversified portfolio. When used in the right proportions, they may not subtract from the end result, but rather add to your portfolio. They may help in reducing the risk or dampening the volatility of your account. They may actually contribute to a much better end result despite their individual characteristics. In fact, less correlation among the investments in your portfolio may be better. (Imagine if those cookies only included the good stuff, like sugar and chocolate chips!) Asset classes that one may feel inappropriate as an individual investment, in many cases play a critical role in the success potential of the entire portfolio.
So next time you and your advisor review your investments, be sure your recipe includes a wide array of asset classes. In the right amounts, and whether they taste good or not, they just may be an important ingredient to successful outcome.
Securities and advisory services offered through LPL Financial, a Registered Investment Advisor, Member FINRA / SIPC. Material discussed herewith is meant for general illustration and/or informational purposes only, please note that individual situations can vary. Therefore, the information should be relied upon when coordinated with individual professional advice. Investors should be aware that there are risks inherent in all investments, such as fluctuations in investment principle. With any investment vehicle, past performance is not a guarantee of future results. Diversification and asset allocation strategies do not assure profit or protect against loss.