Does thinking about investing leave a bad taste in your mouth? With all the jargon that gets tossed around, it’s not uncommon to feel like you have egg on your face when you try to make sense of it all.
Here’s some food for thought: think of your financial plan like ingredients for a recipe. Just as there are seemingly endless ingredient choices (meats, vegetables, spices, etc.), there are seemingly endless investment options (stocks, bonds, mutual funds, etc.). Your dietary needs and the time you have to make a meal may determine whether you consume a pre-packaged meal or make everything from scratch; similarly, your financial needs and time horizon may determine what your financial plan needs.
Just as taking a cooking class can help you improve your culinary skills, I can help you help you craft a financial plan that suits your palate by focusing on these basic ingredients:
- Allocation, diversification, and rebalancing.You’ve heard the saying “Don’t put all your eggs in the same basket.” That’s exactly the idea behind how diversification can help you reduce risk. Asset allocation builds on that by looking at security or investment risks in the context of your whole portfolio rather than in isolation. As markets move, the asset allocation can shift; rebalancing is the technique that gets your plan back on track.
- Buy low, sell high.It sounds intuitive in theory, but in practice it may mean buying an underperforming asset and selling an asset that’s performing well. Underperforming markets are actually the best time to invest: lower prices mean you can acquire more of an asset, which better positions you for when the market goes back up.
- Stay focused on your long-term goals, not short-term market fluctuations.You can’t predict or control market movements, which is why it’s so important to not let it control you. Don’t let short-term market fluctuations deter you from achieving your long-term goals.
Let’s create or update your own personal recipe for success to ensure you stay focused on achieving your long-term goals. If you have any questions about this or other tax and investment related topics, please let us know. We’d love to hear from you. Bon appétit!
Diversification and asset allocation do not assure or guarantee better performance/profit and cannot eliminate the risk of investment losses in declining markets.