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Cooking & Asset Allocation

Cooking & Asset Allocation

August 07, 2023

Not sure how to put together an investment strategy? How much should you invest in stocks, bonds, real estate and other asset classes?  

When you start to build an investment strategy it is important to have a goal and purpose in mind. What do you need the portfolio to do for you?  What type of return do you need to attain?  How little risk can you take to meet your goal? How much risk are comfortable taking in an effort to accomplish your goals?  These are just a few questions a financial planner can help you navigate and answer before building an investment strategy and asset allocation. Over 80% of your investment returns will be tied to your asset allocation.  

Asset allocation is the process of distributing your investments across different asset classes, such as stocks, bonds, real estate, and cash. It is like cooking because both involve carefully selecting and combining different ingredients to achieve a desired outcome. Just as a chef considers the flavors, textures, and nutritional value of various ingredients, an investor evaluates the characteristics and potential returns of different assets.

Here's a breakdown of how asset allocation can be compared to cooking:

  1. Recipe or Investment Plan: In cooking, you start with a recipe that outlines the ingredients and steps required to prepare a dish. Similarly, in asset allocation, you begin with an investment plan that defines your goals, risk tolerance, and time horizon. It serves as the blueprint for constructing your investment portfolio.

  2. Ingredients or Asset Classes: Just as a chef chooses a variety of ingredients to create a well-balanced and flavorful meal, an investor selects different asset classes to create a diversified portfolio. Each asset class has its own risk and return characteristics. For example, stocks may provide higher returns but also carry more risk, while bonds are generally considered more stable but with lower potential returns.

  3. Proportions or Allocation Percentages: Just as a chef determines the proportions of each ingredient based on the desired taste and nutritional balance, an investor decides how much to allocate to each asset class based on their financial goals and risk tolerance. This allocation is typically expressed as a percentage of the total portfolio value, such as 60% stocks, 30% bonds, and 10% cash.

  4. Preparation or Rebalancing: In cooking, the ingredients are prepared, combined, and cooked in a specific manner to achieve the desired result. Similarly, an investor periodically reviews their portfolio and adjusts the allocation to maintain the desired balance. This process is known as rebalancing and involves selling or buying assets to bring the portfolio back to the target allocation.

  5. Presentation or Portfolio Performance: Finally, just as a chef presents the cooked dish to be enjoyed, an investor evaluates the performance of their portfolio over time. The goal is to achieve a balance between risk and return, considering factors like market conditions and personal financial objectives.

By comparing asset allocation to cooking, it becomes easier to understand the importance of diversification, risk management, and periodic adjustments in investment portfolios. Both processes require careful consideration, planning, and a balance of different elements to achieve a successful outcome.

If you are looking for guidance, help or prospective on building an asset allocation to serve your financial plan.  Consider Sterling Edge Financial a resource.  

Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal. Diversification and asset allocation strategies do not assure profit or protect against loss. 

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