Caring for Your Financial Garden

Caring for Your Financial Garden

By: Stacey Nickens

To me, freshly-grown flowers fill me with so much hope. As Audrey Hepburn once said, “To plant a garden is to believe in tomorrow.” Each Spring, I reserve my spots at the community garden. I pick out what seeds I will plant, and then I carefully tend to those seeds, sprouts, and eventually plants throughout the rest of the season. I return to my garden each weekend with the belief that I’m investing in tomorrow. I’m investing in fresh produce for my home. I’m investing in a healthier earth. I’m investing in my own well-being.

With Earth Day around the corner, and spring in full bloom, April is also a wonderful time to think about your financial garden. Just as with planting a literal garden, caring for a financial garden shows that you have hope for a better future. You care about your quality of life tomorrow, in 5 years, and in 10 years. You care about your children’s and grandchildren’s quality of life, and you’re accordingly invested in making your financial garden as healthy as possible. Keeping those goals in mind, what seeds, soil, fertilizer, and care routine will help you grow towards a financially-healthy future? What can we learn from botanists and farmers in order to become more financially savvy?

Lesson 1: Crop rotation teaches us the importance of diversification and of withdrawal strategies. Many farmers practice crop rotation, in which they annually vary what type of crop they plant in a specific section of soil. Farmers do so in order to take advantage of plant diversity. Different crops are susceptible to different diseases and pests. Different crops also pull different nutrients from the soil. By rotating crops, farmers help prevent specific diseases or pests from becoming permanent residences in a specific section of soil. They also ensure the same nutrients aren’t drained from the same plot of soil year after year.

Similarly, different investments are susceptible to different risks. Some carry the risk of not generating enough growth, while offer more stability to your portfolio. Others carry the risk of volatility, while offering more growth to your portfolio. You don’t want too much stagnation or volatility to burrow into any of your investment or savings accounts. Accordingly, you want to put your money into a variety of investment vehicles, sectors, and markets in order to balance different risks and rewards. Similar to crop rotation, you also want to periodically rebalance your portfolio to make sure volatility or stagnation aren’t draining your investment portfolio.

Additionally, when you reach retirement, you will eventually be required to make withdrawals from your investment accounts. Doing so partially drains the nutrients from your accounts, and you will want to come up with withdrawal strategies that ensure your investment soil has time to recover. You can start by trying not to withdraw more than 4% of your account’s principal each year. You can also take withdrawals from different accounts on different years, effectively rotating your withdrawals like a farmer rotates his crops.

Lesson 2: Healthy plants can only grow in healthy soil. Similarly, healthy investments only grow from healthy companies. A tomato growing in nutrient-poor soil will be far less likely to thrive than a tomato growing in nutrient-rich soil. In the same way, you will likely want to invest in companies and sectors that have “healthy soil”. In part, this means the company has a healthy balance sheet. They are posting growth each year. Their earnings reports are strong. The company has a good management team.

You can also consider something called ESG investing. ESG investing stands for Environmental, Social, and Corporate Governance investing. When you participate in ESG investing, you work to ensure that you’re investing in companies who engage in responsible environmental, social, and governance practices. To some, this may seem unnecessary. You may be thinking: If the company is making money, why do their ESG practices matter to me? However, you may want to consider the longevity of any company’s practices. A company engaging in environmentally and socially responsible practices may be less likely to face governmental regulation and lawsuits that could hinder their business growth. Additionally, a company with healthier governance practices may have stronger management, and a strong head makes for a healthier body.

Lesson 3: Let your investments grow but adapt to changing environmental circumstances. Market drops make us all nervous. However, imagine a garden where a farmer dug up his crops every time he experienced an adverse weather event and planted new seeds after the weather passed. Would that farmer have the healthiest garden by the end of the season? Probably not. Plants often do better when you allow them to stay planted in their original environment, even if they are facing adverse conditions. Also, if you keep planting and then digging up sprouts, how will the sprouts ever grow into adult plants?

Investments, like plants, need time to grow, and giving investments time to grow often involves holding your investments through adverse market conditions. In investing, there is something called the Rule of 72. The Rule of 72 tells you how long it will likely take for your investments to double. You simply take 72 and divide it by the going interest rates to see how long it would take investments to double in specific market environment. For example, pretend you invest $10,000 in Amazon stock. Assuming an annual 8% interest rate, it would take around 9 years for your Amazon investment to double in value and be worth $20,000. However, if you keep buying and selling Amazon stock, instead of buying and holding, the Rule of 72 clock will keep restarting. You may find that it takes your investment 15, 20, or more years to double if you don’t give it proper time to grow.

However, farmers don’t just leave their plants unprotected in the middle of a May snowstorm. While the farmer doesn’t dig up his strawberries, he may cover them with a garden blanket. He may avoid watering his plants for a few days, so they don’t ingest too much moisture. Similarly, investors will likely want to take some actions during adverse market conditions. You may want to harvest, or sell, some strongly-performing stocks to preserve their gains. You may want to seek out sectors that are still performing strongly, even with the dip, and invest in those sectors. So while you don’t want to suddenly uproot all of your investments because of a market dip, you also don’t need your investments to sit out in the cold, unprotected. You can take measures to protect your money from frostbite.

Disclosures: Past performance is not a guarantee or a reliable indicator of future performance. All securities carry a unique set of risks subject to a variety of factors. There is no guarantee that these investment strategies will work under all market conditions or that they are are suitable for all investors. This material has been distributed solely for informational purposes and should not be considered as individual investment advice or recommendation. Individuals should consult their investment professional prior to making an investment decision.
By Categories: Blog, Financial PlanningPublished On: April 19th, 2021