It has happened! We have finally had a glimpse of spring. I took advantage last night of the warmer weather and sunny skies to finally rake up all of the debris from this long cold winter. While my daughter ran through the grass and went down her tiny brightly coloured slide, I cleared away last year’s leaves from the garden beds, so my budding daffodils could have some much needed breathing room. As I noticed their tiny green shoots erupting from the ground I thought about growth. I started thinking about how we can do some financial spring cleaning in order to allow for growth within our financial lives. Then I thought it would be quite fun to see how far I could take this gardening as a metaphor for finance, while still providing insight into the importance of growth in your portfolios. Hold on, because there are a lot of metaphors coming your way (well actually they are similes).
Growth is the key principal of investing. If your money doesn’t grow then it will wilt. As we know things are just getting more and more expensive every year. In finance, the word we use for these increasing costs is inflation. Inflation is currently sitting around 2% per year. If a chocolate bar costs me $1.00 today it will cost me $1.02 this time next year. If I save that dollar in my pocket it will not be able to buy me a chocolate bar a year from now, it will have essential lost 2% of its value. The minimum standard for growth in our investments must therefore be to beat the rate of inflation. Think of inflation like a weed. If it outgrows what you have planted (your investments) then it can stop them from producing any flowers.
Now that we have established why growth is important let’s look at what kind of growth we at Wetherall Wealth Management tend to pursue. I know a lot of people see the returns of their portfolios as a bragging point. “This year so far I have made 11%”. Guess what? It’s not a competition. While we value growth in the portfolio and certainly are pleased to get great returns, we are not chasing the fastest growing stocks we can find. We are looking for safe and steady growth for the long term. We like to invest in high quality dividend paying stocks. Think about tiny saplings growing into gigantic trees, it takes a long time, but with patience and discipline the results are magnificent. You won’t get a giant tree, if you keep chopping your saplings down and re-planting new ones. Hold on to quality stocks and they will provide the consistent growth you need to meet your goals.
So what can we do to ensure that our financial garden is in order to allow for our investments to blossom? The first thing we need to do is make sure that we choose a diverse range of stocks that work well together. You wouldn’t want a garden full of Chives and nothing else, the same way you don’t want to invest yourself entirely in one company, industry, or region. Stay diversified so that your garden will thrive even if one plant fails. If you don’t have enough to invest in a portfolio of around 20 different positions, then you should invest in a diversified Mutual Fund or ETF that can do the diversifying for you.
Another way to keep your financial garden tidy is by re-balancing. Sometimes we have certain investments that grow faster than others. They are like those bushes that just grow and grow and take over the place. Just like those bushes, we need to maintain our investments, and trim back the overly successful ones. We call this re-balancing. Re-balancing is part of our investment discipline and takes place at least annually for all of our clients. Unfortunately it is emotionally difficult to re-balance. “Why would I sell those stocks? They have been doing so WELL!” Again it comes back to keeping a tidy financial garden. In order to keep you on target for your goals we have to sell the winners and buy some of the less successful stocks because next year things may have changed and that winner may not be doing so well anymore.
So, what is the easiest way that we can help our gardens grow faster, and with less work? Obviously the easy thing to do is to hire a gardener. This is why we have enrolled many of our clients in the A+ Platform. This platform acts as a gardener who comes in and automatically trims your hedges for you. Once we agree on the types of investments you want to hold in your account, this platform will automatically re-balance either annually, or every time an investment grows too large or becomes too small. Imagine if every time your bushes became over grown someone came to your house and trimmed them. At the same time this gardener would plant more of those daffodils that the squirrels got into, insuring that your garden remains exactly as you want it. The best part is it happens automatically without you having to make the emotional decision to trim back a beloved hedge, or in the investing world sell the stock that has gone up 10% this year.
Just to see how far I can stretch this metaphor, my final piece of advice (today) is to plant the seeds! Nothing is going to grow in your garden unless you plant the seeds. This is all about making sure you are paying yourself first. For those who think saving money is too hard, or they don’t make enough, or they can’t manage it here is the best thing to do: save little and often and early. The earlier you save the longer you have to benefit from compounding growth. So do it today, or better yet yesterday, and then regularly as much as you can. Pick a small amount of money, pay it into an account consistently, invest it in a diversified portfolio and then just watch it grow.