Annuals or perennials: How does your flower choice match your investment portfolio?
By ATB Wealth 16 June 2020 4 min read
This year was interesting for many businesses. Anecdotally, it was a big win for garden centres and greenhouses, based on the line-ups and wait times they all seemed to have in spring and early summer. As people were getting settled into new routines at home, many decided to focus on making their home and yards as beautiful as possible.
One thing that captured our attention was the number of people buying annuals over perennials. Annual flowers are the ones that blossom for one summer and then need to be pulled out and replanted the following year. Perennials are the type that, with proper care, should come back each year and re-blossom.
Let’s take a look at how we can view our investments through this same lens - as an annual or perennial.
If we think about portfolio management, an annual flower could be similar to a tactical portfolio. A tactical portfolio is structured to perform based on the expectations of certain economic or investment themes playing out.
One could say, we think event “X” is going to happen therefore we are going to invest in these specific companies, sectors, or geographies that we deem will benefit from event “X”. However, much like an annual flower, these strategies are not meant to be long-term. They require constant change within a portfolio and there is no guarantee that they will lead to long term success. A tactical strategy is based on the perception that event “X” will occur, but what happens if it doesn’t? Then what does one do? Change the underlying companies, sectors, or geographies again to repeat the process again multiple times throughout the year.
Annuals may look pretty for a season, but then, as the seasons change, they need to be pulled up and replanted. Similarly, a tactical portfolio strategy needs constant re-adjustment as business sentiment, geopolitics and economic fundamentals change. This can lead to increased taxes paid (if the investments are held in a taxable account), increased transaction costs and lower long-term growth as the constant change in underlying investments does not allow for compound growth that may require longer investment periods.
It can also encourage poor investor behavior as changes are made based on forecasts that may or may not have any long-term advantages. In essence, an investor is planting seeds and hoping that a few will grow before the season is over.
Perennials are flowers or shrubs that normally come back each year, and if we think about portfolio management, they could be similar to a strategic asset mix.
When a garden of perennials is planted, there is typically a plan for where each one will go. Which ones need full sun versus shade, and typically placing the ones that will grow tallest at the back. A strategic asset mix involves setting the appropriate asset mix (split between stocks and bonds) based on an individual or family risk tolerance, investment goals and many other factors in advance. An investment portfolio is then built around that strategic asset mix and companies operating in various sectors and geographies are chosen.
Perennials do not necessarily equal a “plant it and forget about it” garden. Each year, they typically need to be pruned, with the dead growth being cut off, fertilized and perhaps even the odd one didn’t last our harsh Canadian winters.
A portfolio with a strategic asset mix is no different. Each year, the asset mix should be re-visited to ensure it still makes sense for the individual or family risk tolerance and long-term goals. Questions should be asked like; have there been any changes in the last year that would cause the asset mix to shift? If no changes need to be made, the portfolio should be frequently rebalanced (much like pruning a perennial) to get it back to the desired asset mix. This involves selling assets that have performed well and adding to those positions that have not done as well. This creates a good habit of buying low and selling high.
This type of portfolio strategy can lead to more optimal long-term results. Portfolios are created based on a longer term strategy and provide a better backdrop for compound growth. It also can lead to healthier investor behavior as we are basing the asset mix on the individual or family goals, as opposed to forecasts.
Build your garden for resilience
Living in Canada, we know that our harsh winters are inevitable. In the investing world, our harsh winter represents the volatility that we know will happen. Unlike our winters that come on a schedule, we never fully know when a market volatility blizzard will come our way.
What we can do is build our portfolios the same way we build our gardens- with planning, care and the understanding that sometimes flowers will die off, but the knowledge that sunshine is just around the corner and so is a new season of gorgeous blooming flowers.
Building a resilient portfolio often means taking a greater focus on strategic allocation and investing in companies that we believe can go the distance with us. Much like a garden full of perennials, we know that with a little rebalancing and attention, we can have a healthy portfolio that can survive volatility and help us reach out long-term goals.
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