A Recipe for Investing
“What should we have for dinner tonight?”
Do you ever find yourself asking that question? It’s a dilemma that we face regularly, whether we’re cooking for ourselves, our families, or even planning a dinner party for friends.
In this article, we’re talking about cooking and investing. Why? We’ve found that most people are quite passionate about both food and money. Both require a blend of art and science, a touch of creativity, and a lot of planning.
Getting Started: Setting Your Goals
Before cooking can begin, you need to decide what you’re making. Are you in the mood for something quick and easy, or do you want to challenge yourself with a gourmet recipe? Do you have dietary restrictions or specific nutritional goals?
In the financial world, this is equivalent to deciding your goals. What do you hope to accomplish by investing? Are you saving for retirement, building an emergency fund, or aiming for a major purchase like a home? Just like in cooking, where the end goal determines the choice of dish, your investment goals will shape your financial strategy.
Selecting Ingredients: Asset Allocation
Once you’ve decided what you’re making, the next step in the kitchen is to gather the right ingredients in the right amounts. Are you baking a cake, roasting a chicken, or preparing a salad? Each requires a unique set of ingredients and proportions.
In investing, this step is called “asset allocation.” It’s one of the most important decisions an investor can make. Just as you wouldn’t want too much salt in your dish, you need to balance your investments appropriately. What combination of stocks, bonds, and cash makes sense for your situation?
Crafting the Recipe: Portfolio Construction
A recipe is a set of instructions for preparing a meal. It outlines the right ingredients in the right proportions, combined and cooked in a specific way. Similarly, portfolio construction involves selecting investments based on their expected return and risk characteristics and how they interact together.
Imagine you’re making a complex dish. Each ingredient needs to complement the others, creating a harmonious final product. Investments work the same way. A well-constructed portfolio is a blend of different assets that together aim to achieve your financial goals while managing risk.
Our US Stock Recipe: A Balanced Approach
When creating a US stock portfolio, one of Conrad Siegel’s main ingredients would be the S&P 500. This index represents a broad spectrum of large, established companies across various industries.
To add diversity and potential for higher returns, we might add a dash of smaller stocks (Mid Caps and Small Caps) and sprinkle in some Value stocks. Academic and financial market research has shown that there is a long-term premium associated with value and smaller stocks. These additions can enhance the flavor of your portfolio, much like how spices can elevate a dish.
The Influence of Culture: Global Diversification
One of the best parts about cooking is the influence that culture has on what ends up on our plates. Our culinary experiences are enriched by global ingredients, spices, and techniques. Similarly, your portfolio should have global exposure to benefit from opportunities outside your home market.
Our global portfolio follows a similar recipe. We add exposure to smaller stocks and value stocks and sprinkle in emerging markets. This diversification helps manage risk and can offer growth opportunities as different markets may perform well at different times.
The Importance of Fresh Ingredients
Just as fresher ingredients typically result in a better entrée, high-quality investments can enhance your portfolio’s performance. Staying informed about market trends, economic conditions, and company performance can help you make better investment choices.
Conclusion: The Art and Science of Cooking and Investing
Cooking and investing share many parallels. Both require careful planning, thoughtful selection of ingredients, and a balanced approach to achieve the desired outcome. Whether you’re crafting a delicious meal or building a robust portfolio, the right recipe can make all the difference.
So, next time you find yourself asking, “What should we have for dinner tonight?” remember that the principles you apply in the kitchen can also guide you in the financial world.