There are a lot of similarities between investing and cooking a meal.
Just like every meal should be cooked according to the taste of the person eating it, investing should be done according to the risk profile of each investor.
So what are the ingredients.
The principal ingredients are:
- Low cost ETF, preferably from Vanguard (the lowest cost leader),
- Some bonds, if you are risk averse (but I don’t recommend this), this is like adding a block of tofu to your meal. It’s good for you but it’s tasteless.
- Some individual stocks ( I don’t recommend this either). This is like adding red peppers, a bit can add taste, too much it can ruin your meal.
My favorite investment recipe:
For Canadian investors I like to suggest the following recipe:
⅓ Canadian Index ETF,
⅓ US index ETF, and
⅓ International index ETF.
Depending on how much time and how much interest you have in your portfolio, you could add subcategories. For example. The Canadian part could be subdivided into three subcategories: big companies, Medium size companies and small companies. The same can be done for the US part.
With time, some investors like to build elaborated portfolio which include many asset classes. On the other hand, other investors opt for simplicity. Both are legitimate ways to build a portfolio. For example, for someone in the US, they might buy one big broad index called “The total market index,” or they might opt buy all kind index subcategories individually.
Also, as investors reach their investments objectives, they may decide to add more safe assets or they may decide to add more risky assets.
For example, imagine that as a Canadian my objective was to accumulate one million dollars. I have built my ⅓, ⅓, ⅓ recipe. If I had an additional $100,000. I could say to myself.
I am on track for my retirement, I want to reduce volatility, I will put this new money in boring bonds. Imagine that you are adding a tofu block to you stake.
On the other hand, another person could say. I have met my one million dollar goal. If I had an additional $100,000 I would put it in the real exciting names that continue showing in the business news. If I win, I will be delighted, if I lose, I still have my one million dollars to take care of my retirement. Imagine that you are adding a jalapeno to your meal. Be careful, if you add too much you could ruin everything.
The final touch
In cooking, you have to let your plate simmer for a little bit. In investing, you have to let it sit long enough to let the magic of compounding grow your portfolio. There is no shortcut to this… good investment takes time, there is no other way around it.