Monday, April 23, 2012

More Financial Lessons From the Kitchen

It is time once again to serve up a little kitchen advice to help us become better investors. In planning a special meal, we not only want to fulfill our immediate desires, but also strive to create a well-balanced culinary experience. Some of the techniques for preparing a successful meal can also be applied to improving your investment portfolio. The “recipe” for both includes three soup├žons of kitchen wisdom: plan for variety and balance, use the best ingredients and taste as you go.

You may crave grilled salmon and an apricot-cherry tart, but the meal will not be well balanced and truly satisfying without additional dishes. Perhaps a small salad to start and some grilled potatoes and Romano beans to accompany the salmon, then dessert. The resulting meal has a wonderful variety of colors, textures and flavors, while offering a healthy nutritional balance.

Variety and balance are key elements of a healthy investment portfolio, too. The “balance” of an investment portfolio refers to its asset allocation, the percentage of investments in each of the major categories – cash, bonds, stocks and real estate/alternatives. Selecting stocks in both small and large companies as well as international and emerging markets will contribute to the portfolio’s variety, enhancing diversification. Asset allocation is a picture (like a pie chart) of your variety and balance.

The second rule, choose the best ingredients, is crucial for the success of the meal. The same holds true for the investment portfolio. The best investments (ingredients) are those that have a specific strategic long-term purpose in the portfolio, such as diversification of risk, or providing an opportunity for growth or a steady income stream. Avoid “hot tips.” Often the result of minimal research, they are a gamble based on what someone else believes is good for his/her portfolio.

Taste as you go: you will improve your outcome by monitoring your investments. Be sure to check their performance on a quarterly basis. Is the mix, your asset allocation, still appropriate for meeting your goals and reflecting a suitable level of risk?  Your mix of investments is not something that you set and forget. It needs to be reviewed and rebalanced at least once a year.

Next time you receive your financial statements, think about putting some of these lessons from the kitchen to work.

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