Is investing like fishing? The more I think about it. The more I believe it is true. In both investing and fishing, you are uncertain if you will catch a winner or not.
In fishing, you first select the target species you want to catch. Selecting the target species will dictate the body of water you should pick. If you are targeting a brook trout, you might fish a remote mountain stream. On the other hand, if you were after a blue marlin, you would go fishing in warm ocean waters.
With investing, the concept is the same. In investing, selecting the target species is synonymous to asset allocation. Asset allocation is determining what types and percentages of stocks, bonds, real estate, commodities, etc., you will hold in your portfolio. You select the type of asset you are going after and then you try to catch a winning stock or mutual fund in that category.
Whether casting your line for trout on a cool mountain stream or trolling the aquamarine currents of the Gulf Stream for marlin, you want to catch winners. When out fishing, you will soon ask yourself, “How can I increase my chances of catching trophy size fish?” If investing, you would be asking yourself, “How can I increase my chances of finding winning assets?” The answer to both questions is diversification. Even as a “Not so Good” fly-fisherman, I know to be successful and catch fish, you need to have diversification in your fly box. Successful trout anglers understand the need to have a variety of proven flies in their tackle box. Their lures vary by:
- Type
- Size
- Color
The same tenant holds true with an investment portfolio. You need diversification of assets in a portfolio. Just as one would not go fly-fishing with just one type of fly, all in the same size and color, you should not do this with your investments. Many times people make just this mistake with their company stock. They overly invest in a single asset. If you have more than 10% of your investments in one company (be sure to include the holdings in your 401K too), it is like going to a trout stream with only one type of fly, all in the same size and color. Your portfolio should be diversified by containing:
- Several proven companies
- Companies of different sizes
- Companies from different geographic locations (International companies)
If you have a diversity of flies (by type, size, and color) in your fly box, you stand a better chance of catching a trophy fish. The same is true with a diversified portfolio. Diversification will increase your chances of having an overall winning portfolio.
What kind of winners are you trying to catch?
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Author
Isaac is a Fee-Only (no products sold) Certified Financial Planner® Practitioner. Isaac founded Stalwart Financial Planning with offices in Fayetteville NC and Durham NC. Isaac provides comprehensive planning and investment management services to individuals from all walks of life. Isaac can be reached by phone at 910-867-8464, or by email (iallen@StalwartPlanning.com). Visit him at Stawart Financial Planning www.StalwartPlanning.com.