I often get heckled for using too many analogies when communicating with people, but I have found that the most effective way for me to make a complex topic simple is to find a story, paint a proverbial picture, and compare it to the difficult concept. Analogies tend to stick with us, and despite not being able to understand every detail of the underlying concept, a person can normally refer back to the original analogy, prompting them to recall the pertinent details.
Here is yet another analogy to explain the process of investing: planting a daffodil. After all, spring is upon us, and daffodils represent one of the most underrated flowers of spring.
Disclaimer – I haven’t a clue about how to grow a single thing, so I had to read extensively about this process. So, if you are Queen of the Garden, and decide to write me to correct my details, please know that I will completely ignore you. I do not plant flowers for a living, I manage money. End of disclaimer.
Successfully growing a daffodil is no easy task, as it requires preparation, planting, patience, and pruning. Investing is no different. Here’s how:
PREPARATION. After selecting a site with plenty of sun shine, one must thoroughly prepare the soil. Daffodils grow best in fertile, well-drained soil that is moist, although they tolerate other types of soil as well.
For an investor to “prepare the soil,” they must gather all of the data they have…investment statements, 401(k) allocations and options, bank account data, budgeting records, etc. Failing to do this will result in an unsatisfactory result – your flower will never grow. Get the data if you want your advisor to have the tools she needs to help you.
PLANTING. Daffodils are planted in the fall, weeks before the ground freezes, and must be planted deep enough below the soil so they do not freeze. Additionally, they need room to grow, so they are planted 3-6 inches apart.
The financial equivalent to this is to start early (“weeks before the ground freezes”), find a financial advisor you trust, and let them construct a comprehensive financial plan designed specifically to achieve your goals. Remember, we need “room to grow,” so enter the meeting with goals in mind, not specific actions you think we will recommend. Often, the path you must take to achieve your goals is not the path you WISH to take, but instead the path that gives you the highest probability of success. Also, be very specific when communicating your goals. The more detail you provide, the more we can customize your plan, which stacks the odds in our favor.
PATIENCE. As mentioned above, daffodils are planted in the fall, but bloom in the spring. In other words, it takes a while for these to become visible. Nobody in their right mind would plant the flowers, and proceed to check the flowers 3-4 times per day until they see a bulb. Doing that will only frustrate you, and will cause you to micromanage the watering process, which will likely kill the flower before it blooms.
I believe this is the single most important aspect for people to maintain if they are serious about growing their investment portfolio. Investing money according to a long term financial plan and then checking your progress every single day is an exercise in futility. Just as looking at the daffodil hundreds of times doesn’t make it grow faster, allowing yourself to over inspect your portfolio won’t make your money grow. In fact, it usually makes the investor micro manage the plan. “Why haven’t I made any money?” “When will this plan work?” Too much water will kill the flower, and impatience will kill your portfolio.
PRUNING. It is recommended to not cut the foliage on a daffodil until the flower begins to turn yellow. Once that happens, it is time to dig the flower up, wash the bulbs off, and allow them to dry completely. Next, they should be stored in a bag that allows air circulation (panty hose), until they are ready to plant again.
This last step represents the ongoing management and review process that your ADVISOR, not you, should be doing. There is no need to meet with your advisor more than one time per year. If there are changes that need to be made to your portfolio, your advisor should act proactively and recommend those changes before they become a necessity. However, it is important to realize that many times the best decision an investor can make is do nothing. If your long term goals have not changed, do not change your portfolio just because the stock market gyrates or the media reports scare you. Doing so would be like digging up the daffodil just after it blooms. Nobody can enjoy the beautiful flower if you dig it up early, just as the investor’s heirs cannot enjoy a legacy net worth that never materialized because it was “dug up” too early.