Why gardeners make better investors
For most of Canada, this past winter has been colder and snowier than average. Fortunately, with longer daylight hours, spring is finally approaching and our thoughts turn to warmer weather and, for gardening enthusiasts, digging into our outdoor spaces.
It’s funny how some of the best practices for gardening are also applied by successful investors. So, in consultation with the Newport portfolio management team, we offer these five guiding principles for investors, inspired by practices gardening enthusiasts know by heart.
1. Planning and Design
Many novice gardeners start with great enthusiasm…a plan not so much. It’s easy to buy what catches your eye, falling prey to impulse purchases of whatever is resplendently in bloom at the nursery.
The inevitable result is a mishmash of plants lacking a cohesive and pleasing design – some never even surviving to the next season. This can mean a waste of both time and money.
We see this frequently in the portfolios of prospective clients who’ve accumulated a mishmash of investments and are frustrated that they don’t know what they own, why or what its purpose is in their portfolio.
Planning and design are important, and our team encourages investors to get clear on a few important questions before we can take them on as clients: What am I trying to achieve? What is this money for and what are my objectives for its protection and growth? How involved do I want to be in the management of my investments?
The answers should form the basis of the plan for your assets – and ultimately guide the types of investments ‘planted’ in your portfolio.
Gardeners understand the importance of having a logical planting scheme that is deliberately and skillfully varied. Plant size, colour, texture, blooming season, growing conditions, etc. are obvious criteria for creating a garden design that is cohesive and pleasing.
The same is true with investing – except of course it’s called diversification. Today, investors can diversify by not only stocks and bonds, but also real estate, mortgages, infrastructure projects to name a few alternatives. You probably already know that diversification has been proven to be one of the most important ways investors can reduce the risk of losing money and enhance overall return.
There is such a thing as too much diversification, however. A portfolio can become ‘over- diversified.’ Again, we often see this in portfolios that have so many investments that the strategic effect of diversification is diluted, and the benefits are cancelled out. Everything in moderation.
3. Maintenance and Upkeep
So you’ve methodically planned your garden and planted it carefully to ensure balance and variety. Now you can sit back and relax with a cool lemonade while you watch it gloriously unfold, right? Wouldn’t that be nice?!
Just as weeding, deadheading, pruning, dividing are all necessary tasks to maintain the health, balance and beauty of one’s garden, the same principle applies to investing. Except it is called portfolio rebalancing. Just as some plants are invasive, certain investments may grow disproportionately. Portfolio rebalancing – trimming some of your holdings, adding to others – to bring asset mix back into line with your originally-stated objectives imposes a discipline that can enhance your returns over the long-term. This is one of the best, and yet most difficult, habits for retail investors to execute.
4. A Long-term View
Experienced gardeners know that patience is required for success. And yet, when one is eager for instant results, there is the temptation to move things around constantly. But perennials aren’t like furniture; you can’t keep digging them up and moving them around to see where you like them best.
But many people invest this way – trading in and out of their holdings with equally disappointing results. Study after study shows that the average investor underperforms the overall market because they change course at precisely the wrong times. That is, selling on fear when the market is down, and buying on fear of missing out when the market is roaring.
Better to develop a sound plan, execute it according to plan and stay the course over the long-term.
5. Expert Advice
We will confess our bias here. In both gardening and investing, we believe in paying for professional, sound advice.
The challenge of course is to find a licensed professional advisor you’re happy with. A good advisor should be someone who speaks your language; who will listen to what is important to you and respond accordingly. Like gardening, investing can be enjoyable and rewarding as you watch things develop and expand your knowledge. And if you are new to investing, know that with every success, confidence grows. You may even find you have a different kind of green thumb!
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