In good times and bad on Wall Street, what’s the secret to a hearty portfolio? Try eschewing market timing and cookie-cutter asset combinations, and instead blend ingredients to match your own tastes – and financial goals.
The basket usually contains five or six items hard to cook with, such as collard greens or kumquats. Many things can go wrong, from strange flavors after blending odd ingredients to wrong preparation and poor timing with the oven.
It’s a bit like investing. You can take one of two broad approaches to the markets, the first being a traditionally active one where your investment managers seek success using misplaced securities or market timing (aka, trying to enter or exit the market to seek a profit at the exact right time).
This resembles the “Chopped” challenge, which requires inventing a new and distinctive dish within a set time while using specific items. The chef with the creativity to conceptualize a dish usually has the advantage.
The traditionally active manager locks in on individual ideas, resulting in time constraints and little flexibility. This manager believes that a quoted price doesn’t reflect some critical information about that investment, giving him or her a unique edge. If this information proves untrue, of course, little chance may remain to change the plan before the dish (your investment) is ruined.
The second approach: The manager tries to track the market as closely as possible, a tactic known as index investing. The goal here is not creativity or standing out but tracking the averages and riding the market.
This approach lacks flexibility. As on “Chopped,” you can’t substitute one ingredient – or stock – for another.
What if we combined the creativity of the first approach with the simplicity of the second?
With this third method, you don’t face unnecessary constraints either in terms of time or ingredients, putting together a broad selection of dishes from multiple ingredients appropriate for the season and when you choose. This way, you can focus on what you can control and eliminate what might restrict your success.
This third technique is the optimal strategy for investing. The first, picking stocks and timing the market, is like making an ingenious and delicious meal in an efficiently and consistently, a tough task even for masters. Cooking off a provided menu, like the index managers, can be inflexible and costly.
We can instead research the dimensions of expected returns, design highly diverse portfolios that pursue market premiums and build flexibility into the system so that we serve up investment solutions for a wide range of needs.
Your best course: Diversify your portfolio and define your needs. Like a winning dish on a cooking show, delicious.
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