It’s February, the month of Love! Do you know the history of Valentine’s Day? Beyond the “Hallmark” holiday it has become, there is some interesting history. Have we peaked your interest, read more from the History Channel: History of Valentine's Day. Since it is the month of love, how about a little lovin’ from the oven...
How investing is like baking
by Scott DuMond, CFPⓇ
With Valentine’s Day approaching, consider making something you love for someone you love. How about chocolate chip cookies? My wife has made excellent pies since the day I met her. She makes a fantastic flakey crust, just like her mom’s. Her apple pies are legendary! However, as good as her pies have been, she has always had difficulty making chocolate chip cookies. She admittedly said so herself. We have friends that make outstanding chocolate chip cookies, like none other. They even shared the recipe with us. However, every time my wife, Valerie, tried to repeat the mix they always came out flatter and harder than expected. They were still chocolate chip cookies, don’t get me wrong. My boys and I would still eat and enjoy them, but something was still amiss.
One day while thoroughly enjoying the cookies baked by our friend, we lamented Valerie’s inability to match the quality. We asked what her secret was. We were overjoyed when our friend invited us over for a “Cookie 101” demonstration. Valerie received first hand instruction on how to create those much coveted cookies. She was in her glory for baking is one of her passions.
Here is what we found out…
Make the whole recipe, it makes a big difference.
DO NOT use softened room temperature or melted butter. To quote our friend, this will make the cookies “flat and bleh”! Instead take the butter out from the refrigerator first before gathering up all the other ingredients and equipment.
This is the clincher…when creaming the butter and sugars together, use a mixer and be sure to mix for a good four minutes! It must be CREAMY. Repeat the four minute creaming process after adding the eggs and vanilla to the butter sugar mix.
When mixing the dry ingredients into the wet ingredients mix only long enough to blend the two together. *Over mixing will produce tough cookies.
The last hint is to UNDERBAKE the cookies. Pull them when they are just getting golden brown around the edges and on top.
My wife has been elated to add this fantastic recipe to her baking repertoire.
Now let’s apply these concepts to investing.
It is no secret that the investors, on average, receive a lower return than the assets they are investing in. For example see the graph below based on a study by Dalbar ending in 2016. Over a ten year period, the US stock market earned an annualized return of 6.95%. Over the same time frame the average stock investor return was 3.64%.
This relationship has been consistent from study to study and time period to time period. Investors tend to get a much lower return then the investments they are investing in. How come? It comes down to one simple truth.
While many people are able to come up with a reasonable diversified portfolio by themselves or with help they will make a change when investments are doing poorly. When there is bad news and the market is losing money, yes December was very painful for me too, people will find it necessary to sell their mutual funds and wait for the market to rebound. This is an example of buy high, sell low and then buy high again. *By over stirring and over changing their portfolio, not only are they missing out on returns, they are hurting themselves substantially.
If we were baking and we over stir, we end up with flat hard cookies. If we are investing and we move money around too much, we end up with lower returns.
So what should we do?
Choose an appropriate investment mix that fits your risk tolerance.
Measure your risk tolerance each year to make sure that it hasn’t changed. We hate having a market drop remind us we are taking more risk than we are comfortable with.
Rebalance when there is a change in your asset allocation due to excessive returns or drops.
Do not react quickly and take your money out of the market when there is bad news and the market drops. Instead, look at this as a buying opportunity.
Interested in the famous recipe Valerie now uses?
1 lb butter
1 ½ cups sugar
2 cups brown sugar (not firmly packed)
2 tsp vanilla
3 eggs
6 cups flour
1 ½ tsp baking soda
1 ½ tsp salt
4 cups chocolate chips
Instructions:
Preheat oven to 350 degrees
Using a mixer, cream together butter and sugars (4 minutes)
While creaming the butter and sugars, mix all dry ingredients in a separate bowl
Add vanilla and eggs to the butter and sugar mixture, beat another 3 to 4 minutes
Add the dry ingredients into the wet mixture, along with the chips. Mix only until blended through and dough forms.
Bake one tray at a time for 8-10 minutes (until just barely golden brown)