Broker Check

Practical Planning Tip: Investing is Like Birthday Cake - The Frosting

February 23, 2024

Today we will discuss the "Frosting" component of an investors birthday cake. Frosting is the second most important part of any birthday cake and while less important that the cake itself, it is still prudent to include when designing your investment strategy. Afterall, without frosting the final cake can be a real dud. Frosting comes in many flavors: vanilla, chocolate, strawberry, and many more. There is not one right type of frosting, but having some is important.

The frosting within an investor’s portfolio are the sub-asset classes to stocks, bonds, and cash that help keep the portfolio adequately diversified. They may also help increase the probability of a better risk-adjusted return if executed correctly. For example, investors should consider having exposure to both US stocks and overseas stocks, large company stocks and small company stocks, they may even want to emphasize a particular industry of stocks like real estate or technology. This also applies to bonds. An investor may want a mix of tax-free state municipal bonds, US government bonds, corporate bonds, and even overseas bonds. Furthermore, depending on the investors’ goals they may want bonds that mature in a year, five years, or ten years.

The underlying principle is that if one area of the stock or bond market is lagging, then another area will be performing well. This yin and yang relationship between various investments helps maintain portfolio harmony even during market volatility. It will also keep your emotions in check during challenging economic environments.

You can WATCH the video here.