Thanksgiving: The one day of the year it’s perfectly acceptable to indulge in all of your favorite dishes. But if you overdo it on turkey or take a risk on that interesting looking mushroom dish, you might miss your chance on apple pie. So, what’s your strategy when picking which dishes to dive into?
In a lot of ways, your Thanksgiving food strategy should look like your investment strategy: Both a diversified plate and a diversified portfolio are the best approach.
Diversification makes a delicious plate.
A diversified portfolio — one with a healthy mix of stocks, bonds, cash, ETFs, mutual funds, and possibly more — helps optimize your portfolio based upon risk appetite. When your portfolio is well diversified, returns are optimized to your risk profile, which can help you build wealth, even if some allocations don’t perform as expected.
Think of it this way: If you only get turkey on your plate and it’s overcooked, that’s a pretty unsatisfying meal. But if you opt for the turkey as well as several side dishes, some overdone meat won’t ruin your meal.
With any large holiday meal, you’ll want to map out your strategy before you load up your plate. The same is true when it comes to building a diversified portfolio. And to do so, you need to understand your risk tolerance and your time horizon.
When it comes to taking risks with your money, are you conservative, aggressive, or somewhere in the middle? Risk tolerance has a huge impact on your asset allocation.
Your short-term and long-term financial needs should also be considered. If you’re investing to retire in 40 years, you can focus more on long-term moves. But if you’re looking to use the money in the short-term, you’ll need to adjust your strategy accordingly.
Dollar-cost averaging is a popular strategy for diversification-focused investors. It involves investing the same amount of funds into stocks, mutual funds, or ETFs on a regular basis, like monthly or quarterly. That means more focus on building wealth through consistency and less on finding that unicorn to sell at just the right time.
Another strategy is the Rule of 110, which can act as a guide to keep your portfolio diverse in relation to where you’re at in life. How does it work? You simply subtract your age from 110. The number you’re left with is the percentage of your portfolio that should be invested in stocks.
For example, if you’re 60 years old and a moderate investor, the rule of 110 states that 50 percent of your investments should go toward stocks. The remainder of your portfolio would be in more conservative investments, like bonds and cash.
Once you’ve got your strategy mapped out, you’ll likely be investing in various asset classes — from equity (stocks, ETFs, index funds) to fixed income (bonds) and possibly even real estate or commodities — and across industries.
And if you take a discerning look at your portfolio, you might realize that it closely resembles your Thanksgiving feast.
Stocks: Grab a hearty portion
The turkey is the centerpiece of any Thanksgiving meal — and stocks are often the main portion of a diversified portfolio.
If you follow the rule of 110, you can find out just how much your portfolio should be made up of stocks.
To have a diversified portfolio, you’ll want to not only own stocks, but also a variety of them. Large-cap U.S. stocks can be relied upon for steady, long-term growth, making them a good option for your stock-focused piece of the pie. But mixing in small-cap and foreign stocks can help balance things out. Consider it a white meat/dark meat sort of relationship.
Bonds: The must-have side dish
Sweet, mashed, au gratin, etc. Potatoes and bonds come in many shapes and sizes. For your portfolio, you might want to consider adding a healthy dollop of bonds into the mix.
Bonds, in general, are important in portfolio diversification because they can provide fixed-rate income — a more consistent and reliable cash flow. Investing comes with risk, but bonds are generally considered a safer investment because the U.S. federal government backs them.
If you’re a moderate or aggressive investor, consider bonds a side dish to your stocks. But if you’re more conservative, bonds could make up about half of your portfolio.
You’ve got your meat and potatoes, but you’re still hungry and there’s still room on the plate. So what about those other tasty turkey day dishes?
ETFs: A flavor-packed stuffing
Start with bread. Add the giblets. Lots of butter. Celery. Garlic. Parsley. Salt. Pepper.
Mutual funds and ETFs can be a great way to diversify your portfolio without too much work. Both are made up of multiple securities, meaning if you want to invest in an industry or sector but don’t want to expose yourself to one company’s stock, mutual funds and ETFs help you diversify your risk.
That’s the deliciousness of diversification.
Cash: Your gravy
Nothing ties a Thanksgiving meal together quite like gravy. It’s that trusty option that fits just about everywhere and on anything.
In a diversified portfolio, cash is your gravy.
A cash-enhanced robo portfolio gives you the opportunity to earn interest on money sitting in your portfolio. With our option, 30% of your cash acts as a buffer, reducing your risk while earning interest at a competitive rate.
Non-traditional investments: A piece of the (pumpkin) pie
Yes, you’ve saved room for dessert … but just a slice.
It’s never a bad idea to have a small portion of your portfolio pie reserved for less traditional investments, like commodities or foreign currencies. They’re riskier investments, but can have higher payouts.
This can also be a good area to allocate funds into real estate or real estate investment trusts (REITs). Real estate is generally a lower-risk, potentially higher-reward investment when held long-term, and REITs allow you to invest in companies that own and operate commercial real estate like office buildings, apartments, hotels, and more without being responsible for collecting the rent payments yourself.
Rebalance your plate.
Just because you only took one spoonful of potatoes doesn’t mean you can’t come back for seconds (or thirds or fourths). After all, keeping an eye on your portfolio and rebalancing when necessary is an important step to becoming a successful investor.
For example, one portion of your portfolio could outperform the remainder of your portfolio over time, earning you high returns but exposing you to more risk than you’re comfortable with. So, you’ll need to take another scoop of those metaphorical potatoes and transfer those assets into a more conservative investment.
In all, your portfolio plate should contain several components. While stocks are the centerpiece of any Thanksgiving meal/portfolio, those side dish investments can help balance your risk appetite. Add in some bonds and ETFs, and a bit of pie, ahem, alternative investments, and you’ve got yourself a well-rounded, diversified investment feast.
Start investing today with our Self-Directed Trading Account or our Robo Portfolio.