It’s the height of summer here in New Jersey and since we aren’t dining out like we do normally this year, it’s a perfect time to fire up the grill and do some real barbecuing, isn’t it? Hopefully you can do that and well, as strange as it may seem, I find that barbecuing is a lot like investing basics! What?
Yes, you read that right. Before you write me off as crazy, follow along and I’ll explain how a good basic investing strategy is like cooking good barbecue (with the disclaimer that I’m neither a barbecue nor an investment expert). Many people don’t know a lot about investing, and so they’re afraid to start. This can have a significant impact on your retirement savings and the growth of your wealth. Learning the basics of investing isn’t that difficult, and in fact, it really is a lot like cooking barbecue!
Cooking Good Barbecue?
Despite my northern roots, I love a good barbecue just as much as the next person. Brisket, ribs, pork butt, chicken…it’s all good. So last week, when the country pork ribs were on sale at the supermarket, I picked up a few pounds and my mouth started to water for dinnertime to arrive. While they were cooking, I had time to think over the process and how similar it can be to good investing, and so here I present for your reading consumption (pun intended!): how to invest like you’re cooking barbecue.
Know What You Want
Just like an investment broker might say, even barbecue experts don’t always agree on what the finished product should look like. Some want a dry rub, others want it sauced. Some want it spicy, others want it sweet, and still others want it smoky. It could be beef, pork, chicken, or some other meat. You need to know at the start how you’re going to prepare your barbecue, because what you end up with depends on what you use. It’s the same with investing.
In investing you want a good return on your money (not too much to decide there!). But you also need to know what you’re willing to do to get that return: your risk tolerance. Greater risk can yield greater rewards, or greater losses. So it’s a matter of how much risk you are comfortable with, how long of a time frame you plan to invest, etc.
The good news is that a good investment counselor will always use a questionnaire which aims to determine how much risk you can tolerate, and generally they result in putting you somewhere on a risk scale. It computes a suggested asset allocation (what percentage in riskier stocks versus what percentage in safer bonds). Every financial institution will have its own tool for assessing your risk tolerance, but for starters, you can try and determine it yourself by simply asking yourself some basic questions or try this investor questionnaire at Vanguard.
Making the Right Blend
While some barbecue experts may claim a secret ingredient, the real secret tends to be the blend or ratio of ingredients. For example, in a dry rub you want to plan the ratio of salt to sugar and also add in the element of heat. Balance is the key to great flavor.
In your investments, this balance consists of diversification and asset allocation. Diversifying your investments simply means not putting all your eggs in one basket, but making a good blend of asset classes. Asset classes include stocks and fixed interest bonds, but drilling down can also reference specific categories, such as large-cap growth or mid-cap value.
Asset allocation is the percentage of the pie you will invest in each main asset class. Over time your investments may shift your asset allocation (for example, if your stocks are outperforming your bonds, it may grow to a larger percent of your investment) and then you should rebalance, or move your investments to better reflect your desired asset allocation.
Cook It “Low and Slow”: Low
If barbecue had a motto, it would be “low and slow”. In case you’re not familiar with the term, it’s the method of cooking meat at a low temperature (the “low”) for a long time (the “slow”). Cooking it on low heat allows the meat to stay tender and moist, and helps to give barbecue its distinctive melt-in-the-mouth texture.
In investing, the “low” is that you don’t need to save up a ton of money before you can begin investing. In this age of e-traders and advisors, you can start with a relatively small amount and contribute steadily. And just as the heat gradually cooks the meat, you want steady general upward progress, a smooth ride when investing and not dizzying highs and lows.
Cook It “Low and Slow”: Slow
Of course, if you’re going to cook it on a low heat, you’re going to need a longer time to reach doneness, and that’s where the “slow” comes in. Because of that, you should be sure not to keep opening the oven or smoker, no matter how good it smells, until it’s done or you’ll let the heat out.
On the investing side, it’s “slow” because your investments need time to grow via the magic of compound interest and dividends. Investing works best when you’re in it for the long term. If you’re contributing to an employer-sponsored retirement plan, you may also need to wait to be vested, in other words, to pass the waiting period so that you’ve earned 100% of the employer’s matching contributions. But most important of all, you don’t want to keep moving around your investments. Those who try to time the market or pick the next blockbuster stock generally don’t get good returns as high as those who stick to mutual funds (managed groups of stocks and bonds that are diversified) and wait it out. Slow and steady really does win the race.
Be Prepared for It to Shrink
When you’re planning a barbecue feast, you need to start with a larger portion of meat because it will shrink while cooking. Make sure you’ll have enough for everyone you’re planning to feed. That’s a reality.
Your investments can shrink in a different way, and many times it comes from fees. Make sure you understand exactly what the costs are when you invest. There are expense ratios which represent the costs associated with the internal management of a fund. There can be management fees or advisory fees. There can be annual or custodial fees. And there can be transaction fees or with certain funds, there may be front or back-end loads (additional costs when you either acquire or sell a fund). Remember, it will not only cost you the face value of that amount, but what that amount would have earned over the lifetime of your investments. In other words, the opportunity costs.
What to Do with the Leftovers
If you and your guests manage to leave any barbecue left over (not quite sure how that could really ever possibly happen!!!!), wrap it up tight and put away to eat later. Like a midnight snack maybe.
Sometimes, you can even end up with leftovers in investments. Like that 401(k) from the employer you haven’t worked for in six months. And you left it behind or even forgot about it? You may be tempted to liquidate these funds, but typically there are penalties, plus you’ll lose out on your returns for the future. Either keep it where it is (if your plan permits it) or roll it over into a suitable account such as an IRA. Wrap it up tight, and put away to consume later just like that good ole barbecue!
With barbecue, you can try very hard and if you make a mistake or two along the way you can still find some “good parts” and learn how to improve for the next batch. In investing, you don’t need to be versed in all the finer points to get started. The most important thing is to simply start because timing and the growth of investing is dramatically important. But make sure you ask questions and make sure you understand the basics of what you’re investing in when you do it. Then be patient and your efforts will pay off. To be sure you feel most comfortable you will need some personalized, detailed guidance and that will mean you should find yourself a good financial planner.
So am I crazy, or are investing basics really like cooking good barbecue? Are you hungry enough to do both? Building a good barbecue menu and an investment portfolio are good ideas and can lead you to success. Did this post make you hungry for them?