While it may sound odd to my core audience of tech and biopharma professionals, successful investing bears a number of similarities to successful farming practices. How is that, you ask?
Well, in order to achieve a positive outcome, each requires the right combination of raw materials, tools, and skills to generate a bountiful harvest. Moreover, an excess of any one of these inputs cannot make up for the absence of the other two. Now let’s dig a bit further into key elements of successfully harvesting investment gains.
It’s not a “one and done” activity
Investing isn’t a part-time job. Just as farmers tend to their crops while the sun is out, not just when they get home from work after it’s dark outside, your money deserves full-time attention. Investing isn’t a “set it and forget it” type of activity – it’s an ongoing process that requires constant care and maintenance.
The parallel here is that it takes a very different level of resources and time to grow the crops you’d need to sustain your family year-round than it does to grow your lawn, let alone that much more is at stake. Trying to make investing something you tend to only on nights or weekends can be problematic, especially when markets are open for trading during the workday.
It’s important to understand seasonality & crop rotation
When it comes to farming, it’s commonly known that differences in climate and other growing conditions will determine what is an appropriate crop to plant in a specific location. After all, you wouldn’t try to grow Corn in the Sahara Desert, nor would you grow Bananas in New England.
But it’s often overlooked that a similar argument can be made for investments as well. Not all investments fair equally well in different economic environments. For example, investments with higher growth rates often don’t fare well when the economy slows down, while slower growing investments may perform well in a weak economy but lag during an economic expansion.
Similarly, just as farmers rotate their crops each season to ensure the soil doesn’t become too depleted of certain key resources, diversifying and periodically rotating your portfolio is critical to success. You wouldn’t want to plant only one crop at any given time, nor would you attempt to grow the same crop during all four seasons.
Knowing when the time is right to harvest
Maybe most importantly, it takes skill and practice to know when it’s time to harvest – whether that’s crops or investment gains. Here, there’s always a balance in trying to maximize production while mitigating the risk that you leave the crops too long and risk losing it if frost arrives suddenly.
The same goes for your investments. While timing the market perfectly is impossible, a skilled investor will work to opportunistically harvest investment gains from specific parts of your portfolio. This can mean working to harvest gains with the most favorable tax treatment, or deciding to harvest sooner if they may be at risk of loss. In the latter case, paying taxes on part of a gain is better than losing all of one.
Interested in learning how you can prepare your portfolio to produce during all four seasons?
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This blog was written by Jeremy Bohne, Principal & Founder of Paceline Wealth Management. Paceline is a fee-only investment advisor serving clients in the Boston area, and on a remote basis throughout the country. Paceline specializes in helping tech and biotech executives, physicians, and those seeking financial planning services.