By Sharon Pryse, Chairman and CEO.
Spring has arrived, bringing with it budding flowers and trees, as well as, pollen and sneezing.
As I walk through my garden, I realize how important it is to have the larger trees and shrubs which can be complimented by the flowers, both perennials as well as annuals. The diversification in my garden is part of what adds to the beauty as well as interest. That same kind of diversification should be utilized in your investment portfolio.
Having both the foundation plants of a secure money market or savings account for your short-term needs or an emergency, complemented by different types of investments offering longer-term growth, yet, most likely, with volatility is important.
Pryse gardens, Summer 2016.
You can get diversification through mutual funds, but it is important to understand what is actually in the mutual fund. The underlying investments are like the flowers or plants themselves. I know my annual garden beds will have to be replanted every year and I use them for short-term color and to fill in pockets within the garden. Likewise, there are certain parts of your investment portfolio that need to be closely reviewed every year to see if they are still serving their purpose. However, the more foundational planning, like a mutual fund that holds a broad section of stocks such as a S&P Index Fund, might only need slight fine-tuning, it is seldom replaced.
When the grass is well fertilized, watered and grows, it needs to be cut or it will get too long. The same thing is true with your investment portfolio. If you have stocks or mutual funds that have done well, it never hurts to take some of the gain off the table, the same way you trim your lawn but do not take out all of the grass. By taking gains off the table when markets have gone up and reinvesting in other areas that have not done as well, you are helping to protect the diversification of your portfolio and not become over weighted.
And, then there is the pollen. It is the fruit that provides the growth but sure does cause sneezing. You can think of the capital gains that you might have to pay when you sell investments that have gone up similar to the way we have to deal with pollen in the spring. Nobody likes paying taxes, but it is better to protect a gain you have received than to see it wither away because we were perhaps too greedy to sell when things were up.
Happy gardening and good luck on the diversification in your investment portfolio as well as your garden.
Sharon Pryse, chairman and founder of The Trust Company, may be reached at sharon@thetrust.com.