Our fast-paced world can detract from the more enjoyable aspects of life. The slower pace of the holidays help reminds us not to take those close for granted. Holiday cheer is accompanied by meals, drinks, and plenty of desserts.
A favorite Thanksgiving past time dessert is pumpkin pie. Many recipes have been passed down through the generations with promised threats should the family secret be revealed. Many bakers know slight recipe alterations or process misstep can result in a local bakery order. In many ways, investment portfolios mimic the sensitivities of baking.
Like a Pumkin Pie, investment portfolios must start with the end in mind. What are you looking to create, which then shifts to what ingredients do you have to work with? Afterall, bakers wouldn’t whip up a bowl of eggs, flour, and nutmeg and expect the slurry to magically conform into a baked pie of your choosing.
All too often, individual investors, the media, and sometimes professional investors put the cart before the horse. How often have you seen a “Top 10 Stocks for [enter year],” or “Best Ideas Now,” yet there is no context nor personal application of these suggestions. Interestingly, these lists are never followed up with when to sell such darling ideas or even hint at a track record of their suggestions.
The proper way of designing, developing, and implementing a portfolio follows a recipe. Determine what is to be made with particular thought towards objectives and intended outcomes. Evaluate applicable ingredients paying close attention to their proportion. Mix, blend, and bake ingredients noting the final product is not complete when removed from the oven but may require additional cooling time.
Specific to investment portfolios, review of client objectives, investment horizon and constraints to determine which asset classes to consider. Next is an evaluation of capital markets to determine proper proportions. These first two steps are often summed as asset allocation. This is followed by an evaluation of securities, investment vehicles, and implementable options. The final step, being the trickiest, is to let the portfolio bake and cool for the appropriate amount of time. Warning, it’s tempting truncate baking or cooling time.
Should you enjoy Pumkin Pie and enjoy baking, below is a simple Pumkin Pie recipe with specific ingredients, measurements, and preparation steps.
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