Peanut butter and jelly. Apple pie and ice cream. Baseball and hot dogs. Your grocery cart and your portfolio.
What?? Your grocery cart and your portfolio may seem an unlikely combination. Yet they may have more similarities than you realize.
Hmmm . . . let’s take a closer look.
Which of the following habits best describes your grocery shopping?
Do you fill your grocery cart with the same items each week? Or do you consider the prices for individual food items, thereby seeking to fill the cart with good values? Would you choose to fill the entire grocery cart with only T-bone steaks or race down the aisles just grabbing whatever looks good at the moment? Or do you plan your week’s meals and make a list to take with you to the store?
Having a well-balanced diet requires buying a variety of nutritious foods. A well-diversified portfolio also requires balance and variety. A portfolio comprised of only 5 large cap stock index funds provides little to no diversification, for each holding will have essentially the same underlying individual holdings within the fund. A well-diversified portfolio is one which has investments from several different asset categories – bonds, foreign stocks, small/mid cap stock holdings, to name a few – each contributing different “nutrients” to the health of the portfolio.
How closely do you pay attention to the cost of grocery items? Can you say the same about the pricing levels of your portfolio’s holdings or the expense levels of the funds themselves? You might think twice about regularly buying a week’s complement of fully-prepared, ready-to-go meals from the take-out department, yet how often do you review the price/earnings levels of the largest individual holdings within one of your funds? Or the expense levels associated with operating a mutual fund holding? An abundance of lofty price/earnings levels for the fund’s top holdings or high fund expense ratios may signal that disappointment lies ahead – through the form of falling stock prices and fund net assets values, along with less return for you. By keeping an eye on prices today, we avoid eating Ramen noodles down the road.
Do product recalls on food items catch your attention? Do you check your pantry or refrigerator when you hear about a recall? Or do you blindly just eat whatever is on hand, regardless of any potential contamination? Most likely you do take notice of potential food contamination. Yet many investors pay no attention to their investments – what they own, how they are performing or even competitive or legal threats. That’s akin to consuming a food item that’s been recalled.
Yes, thinking about ways we fill our grocery cart can give us a method for helping improve our investments and portfolio as a whole. Paying attention to the quality and cost of the food we buy and eat seems only natural. We can benefit by giving the same care and attention to our portfolio.
Have questions about your portfolio or individual investment holdings? Give us a call. We’re always here to help.
Image credit: Phil Gold