Each Investment has a Purpose

​This week I am still thinking about the hills I climb and descend on my regular bicycle rides. On my road bike every part is designed to be as light as possible to reduce drag and increase efficiency. One of the heavier items on a bike are the gears. Mine has 16 gears, yet at any given moment I can only use one of them. Those extra 15 add weight, but they are worth carrying along because of the utility they provide. Low gears make possible the climbing of steep hills, while high gears can really get you moving downhill or on a flat road. Each gear has its use and when you need it you are glad you brought it along.
As an investor you have a similar situation. Your portfolio works like a bicycle whose purpose is to get you from one place to another. You want your portfolio to be efficient, not carrying a lot of dead weight to slow you down. The diversified investments in your accounts act like gears on a bicycle. Some are better at making money when stock markets are going up. Small cap growth stocks might be an example of some of these. But when stock markets are going down, the same growth stocks may struggle. For that situation you may prefer to have some value oriented stocks, or income focused investments such as bonds. The markets change regularly, just as the terrain changes continually on a bike ride, so having several gears available for your use can come in handy.
It is not uncommon for me to visit with people who try to create a portfolio with just a couple gears in it. If the markets are climbing, they complain if they have any slow moving bond type investments. But when things are going badly, they wish they didn’t own any growth stocks. They fail to learn what riding a bike has taught me.
My bicycle has a gps which tells me how far I have gone, and at what average speed. Those two numbers are what really matter in tracking my long-term progress. I never worry about how slowly I climb a hill, or how quickly I zoom down the other side, but I focus instead on the final average speed when the ride is through. Though all those extra gears may weigh me down a bit, in the end they provide the results that are important to me by helping make the most of both the hills and the valleys.
When the stock market is hot, don’t complain about your bonds. When markets are falling, don’t regret that you own stocks. Focus instead on having a good mix of investments that can help you both climb the hills and soar through the valleys along the way. Remember to keep your eye on the overall average return those investment gears are working together to obtain for you.