This should be a fun post. And it is my hope that after writing this, I don’t go to my pantry and eat the entire value-pack bag of Peanut M&Ms, but we shall see.
Like Forrest Gump’s saying “Life is like a box of chocolates. You never know what you’re gonna get”, a similar concept applies within the investing world.
You’re contemplating an investment. You have an idea, a prediction, a thought, some background you performed, maybe even some prior buying and selling experience (good and/or bad), but you don’t know 100% sure if you will be happy with it (the chocolate or the investment decision).
What’s the risk of trying a piece of chocolate? Not a whole lot: you won’t like it, you’ll consume some calories and you’ll have a bad taste in your mouth. But what’s the risk of investing in something that doesn’t work out? You lose money and that may outweigh all chocolate-related risks mentioned.
It also depends on how much you decide to invest. My investment in Bitcoin, for example, has yielded the best results so far. The bit of apprehension I had was offset by the minimal investment amount I decided to deploy and yes, there was a pinch of speculation as well. All in all, I’m not losing any sleep. If Bitcoin recovers, that’ll just be a bonus.
I still believe, however that technology is taking over everything. Technological advancements in currency too, are inevitable.
Diversity in Chocolates & Investments
A box of chocolates has a lot of variety right? You got regular or milk chocolate, dark, white, chocolate with nuts, cherries, coconut, and caramel among popular ones.
Variety in investing comes from stocks, bonds, options, ETFs, index funds, mutual funds, REITs, and CDs, all with variable amounts of risk and in no particular order.
In learning about a box of chocolate, there is usually some kind of legend, under the box to help you decide which one to eat.
For investments, there’s Google! You can look up practically anything you want about a stock or fund (e.g., how long it’s been around, performance reports, dividend payments, fees, management history, costs to enter, minimum investment amount, and more).
Realign You Palette And Investments
For chocolate, when we’ve enjoyed plenty of one particular flavor or type, it’s time to try something else. Why, because our objective is satisfying our sweet tooth. If that satisfaction is fading away, we are no longer in alignment with our objective.
This can be compared to reallocating of our investments. We rebalance by selling our winners and buying more losers. And with this same concept, we are re-aligning ourselves with our investment objectives.
For example, suppose investment objective calls for an allocation of 75% in stocks and 25% in bonds. If your stock portion of your portfolio has performed well, you may be in misalignment now, say 79% in stock and 21% in bonds. In order to stay on course with your investment objective, the logical action to take is sell off your stock winners and reinvest the proceeds into bonds to balance out your portfolio to its original 75/25 allocation model.
Alternatives – Dark Chocolate & Property Investments
We have dark chocolate and white chocolate. And we have real estate investments and bonds.
Dark chocolate and bonds – both of these are safe. Isn’t dark chocolate heart healthy? Bonds ofcourse are safe and provide a steady stream of income. You can pick up a bond ETF and diversify as well such as Vanguard’s BND which currently has over 8,000 bonds.
Dark chocolate is not exciting in my opinion. It has more of a bitter taste and not enough creaminess. Bonds are not that exciting too. But bonds balance out our portfolio. For wealth preservation, investment in bonds in important and for health preservation, dark chocolate can help.
White chocolate and real estate – they both appear to be more exotic, a bit rarer than regular chocolate or regular stocks and funds right?
Greed Is Unhealthy
Can you eat a whole box of chocolates? Yes you probably can, but there is an increased risk that you won’t feel good afterwards. This is because there is no balance of food in your body. Your stomach will be full of chocolate and no other, healthier or safer foods to counteract its effects.
The same goes for investing. Can we invest most of your liquid cash into a risky start-up? Sure we can, but there is an increased risk that it may fail. Consequently, we would lose a lot of money because we didn’t offset the risk with other, contrasting investments (i.e. established organizations with proven success in their industry).
The point is to avoid the temptation of greed. You may be influenced to invest in something due to news, friends investing, and other factors. At the same time, you may know much about the investment, its competitors, risk factors, future outlook. This is why Warren Buffet avoided technology stocks during the dot.com bubble. He wasn’t greedy and decided to stick with investments he understands, and is therefore comfortable with.
So there you have it. Investing really is like a box of chocolates. You don’t know for sure what you will get, but with informed decision making, you can determine which flavors or investments are best suited for you palette and your lifestyle!
Join The Discussion:
- When you purchase an investment, what’s the first thought that comes to your mind?
- When you sell an investment, what’s the first thought that comes to your mind?
- What do you think is your range of certainty/comfort when buying or selling investments – 75%, 85%, 95%, 100%?
I use Personal Capital because (1) it’s free, (2) it tracks all of my accounts and overall net worth, (3) my account balances automatically update, (4) it shows how my investments are diversified and allocated in various sectors, and (5) can use built-in tools like “Investment Checkup” to get….wait for it…free personalized advice!
Check out my simple, yet detailed Personal Capital Review here.