Investing is Like Nutrition
Investing is very similar to nutrition/dieting. Both are a mix of art and science, with no one-size-fits-all strategy that everyone can follow. The most important thing when it comes to eating and investing is to find something that not only gets the outcome you desire but one that you can sustain indefinitely.
This can take some trial and error. We’ve all tried -or have thought about trying- those weird juice cleanses or “eat only cottage cheese” diets that promise results in a short timespan (spoiler: they never work). Those sub-par dieting plans are just like the get-rich-quick trading or options strategies you see marketed on financial media. These fads all sound great at first because they promise unrealistic outcomes. After a while, you get fed-up because you realize misleading marketers (or, for people my age, social media influencers) don’t care one bit about your wellbeing or success. They just want your pocketbook.
But how do you set your investments up to succeed for the long-term? To use the nutrition analogy again, you have to treat your portfolio like you treat your kitchen. And they’re two rules to setting up a kitchen for nutritional success:
Stock it with quality products
Create barriers to unhealthy temptations
Let’s dive deeper into both of those topics and why they can be useful for building your investment strategy.
Quality Matters. A lot
The fundamental (and rather obvious) start to a healthy diet is buying healthy food to put in your kitchen. You still may need to learn basic cooking skills, but at least you have the right food in the fridge.
The easiest way to identify if a food is healthy is to check to see what it isn’t. If it is not highly processed (i.e. filled with numerous ingredients, white sugar, and hydrogenated oils) than it is likely healthy and belongs in your kitchen. If it is highly processed, then no matter what the label says, you should refrain from buying it.
The same goes with your investments.
Is it a 3x-levered ETF with junky commodity stocks you don’t understand? Don’t put it in your portfolio.
Or what about this high-flying growth name with wonderful sounding cliches but a business model you don’t really understand? Don’t put it in your portfolio.
But what if this fund promises it can beat the market with its proprietary trading strategy, and all you have to pay is 1% on your assets annually? Don’t put it in your portfolio*.
Like with your diet, if you don’t truly understand what you’re putting into your portfolio, you are bound to find mixed results.
Keep Temptation Away
This is a little less important than feeding your portfolio with stuff you understand, but still vitally helpful in reaching whatever goals you have as an investor.
Our hunger instincts have been ingrained in us for thousands of generations. We crave what used to be scarce (salt, sugar, fat) when we were hunter-gatherers, but what is now readily abundant for most of us to eat. Similar to filling your kitchen with quality products, you have to keep poor food choices out of sight and out of mind because our brains are hardwired to crave them. Very few people on this planet can resist cookies and potato chips when they are in a cabinet a few feet away.
So what are the “junk foods” of investing? Well, for starters, most of what’s talked about on CNBC and written on the big investing blogs is useless banter, and will likely make you a worse investor. Why? Because fear sells, and nobody (well, most people) aren’t going on CNBC to tell you to keep dollar-cost averaging into your Roth IRA. Financial shows provide minimal value to you and actually can be a huge negative to your behavior as an investor.
Another form of investing junk food, of which I would compare to nibbling on a bag of chips, is checking how the market is doing constantly. It is quite tempting, if the opportunity is there, to see how the S&P 500 is doing at 12:17 on a Tuesday. Is there much harm in doing this? Not really. But if you do it constantly it can add-up and create a barrage of signals you don’t need.
This goes for your personal holdings as well. Nothing good comes from checking your investments six times a day if you are buying for the long haul. Out of sight, out of mind.
Nobody is a perfect investor or has a perfect diet. But if you are successful at one and struggle with the other, consider trying to overlap some of the principles that worked in one field in the field that hasn’t. You might be surprised how similar these endeavors are.
*Well, with that one, make sure they aren’t renaissance technologies, and then don’t put it in your portfolio. But you won’t have access to these top funds anyways.
Disclosure: The author is not a financial advisor, and may have an interest in the companies discussed.