I like to describe myself as a man of many passions. In fact, I rarely do something if I’m not passionate about it. My passions include (but are not limited to!) investing and cooking. I just love my Fridays and Saturdays when I have the time to cook a good meal and accompany it with some music and a delicious bottle of wine. Interestingly enough, there are a lot of lessons to learn from cooking that can be applied to investing. Today, I want to use this analogy a little bit further to simplify some investment advice we keep reading about (but that most investors ignore).
Picking fresh ingredients makes it better
Do you know what the great secret is behind any Italian mama’s marvelous spaghetti sauce? It’s the quality of its ingredients! Between you and me, a tomato is just a tomato, right? Well, nothing can be further from the truth. There is a huge difference in taste if you take the time to select your ingredients carefully.
The same rationale is applicable to your portfolio. If you pick and buy anything that’s on special at the grocery store, you might end-up with a few rotten tomatoes in shopping cart. The same is true with your portfolio. Taking your time to analyze each company before you pick them will make an enormous difference. If you want to know how to pick the good ones from the bad ones, here’s how I pick mine.
When starting, not following recipes is hazardous
I remember the first few times I tried to cook something. I thought I was smart enough to do it on my own. After all, I had years of experience in eating good food, so why wouldn’t I be able to replicate those delicious meals? Ah! When you are a beginner in something, the best plan is always to follow someone else’s lead. For example, after watching videos and reading books, I’ve learned how to cook scallops perfectly instead of boiling or burning them.
Building your portfolio is like a following a recipe. If you do it on your own without consulting the experts first, you may end-up burning your portfolio to the ground. Fortunately, there are various starting guides that work just like recipe books. Here’s my recipe to build a retirement portfolio from scratch.
Don’t rush your meal, give it some time
Have you ever gotten into a hurry to cook because you didn’t have time or you were super hungry? When this happens, I tend to skip reading the list of ingredients and instructions and instead increase the oven temperature. Rushing your meal like this will hurt the taste and overall look of your dish. For example, if you serve a steak right off the grill, there will be lots of “steak juice” in your plate (no, it’s not blood – it’s myoglobin). However, if you let the meat rest for a few minutes, your steak won’t spill everywhere and will be delightful. The best meals are often the ones that are done when the cook has plenty of time and the food can slowly evolve into a flavorful meal.
Trying to make quick wins on the stock market is probably the best way to stay your appetite. You skip the analysis part; then make emotional decisions based on little information in the hope of a good return. And this is how you end-up with blood all over your portfolio. What matters most is time in the market, not market timing! Take your time, there is no rush!
A constant follow-up is required for a good risotto
One of my favorite dishes is duck served on a Portobello & asparagus risotto. I’m famous in my entourage for my creamy risotto that is always al dente. Do you want to know my secret is for this meal? I am constantly watching over my oven. I literally take a glass of wine with my risotto while it cooks. As I watch it evolve, I know when it’s the right time to add more broth, Parmigianino… or a sip of wine!
A stock portfolio is not something you build and let go. While you may have some core holdings you keep forever, others will require adjustments. You will also receive constant dividend payments. You need to determine what you will do with them (drip, invest in a new stock or use it to rebalance your portfolio). As a passionate investor, I always keep track of my holdings. This is how I can make successful trades aside from my core portfolio. You can read an example of my dividend income report here.
Don’t forget, when you eat at a restaurant, it’s more expensive and it doesn’t taste better
Finally, I’ll end this analogy with the most obvious tip: if you go to the restaurant, you will end-up paying a lot more than when you cook at home. While sometimes it is better than what I can do, I often find myself a bit disappointed when I see the restaurant bill for food I could have just cooked at home.
Managing your own portfolio isn’t easy and you may end-up making mistakes. Some people are better off with a chef cooking for them. However, you can save a ton of money in fees if you do it. Imagine how much you accrue in fees when you pay 1.50% MER on a $450,000 portfolio… yes… that’s $6,750 per year. At that price, your advisor doesn’t even bring you to the restaurant! Imagine if you could learn to manage your portfolio and save that money each year… You can always start learning from a good cook that earned its credibility through results!
The post Investing is like Cooking – An Investing Guide for a Good Recipe appeared first on The Dividend Guy Blog.