How nutrient-dense is your portfolio?

Posted by Manisha Thakor.
Variety may be as vital to your financial health as it is to your physical well-being.
As someone who has battled body image issues her whole life, I know what it’s like to crave a very specific food—like the mania for radishes that follows an ice cream binge along with the sense of guilt. Our bodies have sophisticated internal mechanisms for notifying our brains of the nutrients they need, and our culture helps guide those cravings, like when your doctor cautions you against that evolutionary adaptation for craving sugar.
In an ideal world, we’d create our investment portfolios the same way we set our food regimens—based on our own unique personal circumstances (age, risk tolerance)—and stay true to the course that is right for our unique situation.

Why a well-balanced portfolio is a lot like a well-balanced diet.

I love gooey, cheesy lasagna, but if I ate pasta for every meal, that concentration of carbohydrates would be detrimental to my health. Overconcentration is harmful to your finances, too: If you kept all your money in cash, for example, you would be vulnerable to inflation, can erode money like termites eat away at the foundations of a home. And you might need to be more vigilant about financial overconcentration, because unlike the warning signals of a poor diet, you won’t develop scurvy from poor financial choices.

Nutrition, like investing, is a balancing act.

While our nutritional decisions can sometimes feel like an everyday battle (Should I add a topping to that salad? Maybe just one more scoop of ice cream?), rebalancing your retirement portfolio can effectively be done just once a year—or whenever your circumstances significantly change, giving you fresh data so you can make tweaks if necessary. No daily agonizing over calorie content and portion sizes! Similar to how a healthy diet fosters maintenance and growth, the purpose of your portfolio is generally twofold: To both maintain—and grow—your purchasing power. Since investing in stocks offers me the best potential for growth, at age 46, that’s where most of my assets are tied up. And to mitigate the volatility, I diversify with bonds.

A woman can’t live on broccoli alone: Diversity within diversity

So you’ve established how much protein you need in proportion to other food groups. Next, take a look at how you’re going to avoid overconcentration within those subgroups. You wouldn’t subsist merely on chicken, when eggs and lentils were in the fridge to add a little variety. I’ve talked before about mutual funds—how, like vegetable smoothies, they have the potential to deliver a mix of all the nutrients you need.
That’s why about 60% of my portfolio is made up of U.S. securities and 40% international securities. To some people, that seems like an alarming percentage. But when you consider that U.S. stocks only represent about 50% of world market capitalization (i.e., the value of all publicly traded shares), it makes sense that around half of my stock allocation is dedicated to U.S.-based capital.
Merely deciding you need to eat more vegetables is not good enough: You most likely need to diversify further. For a truly balanced diet, you can’t eat just broccoli or sprouts. True diversity is achieved on a nutrient level. Certain vegetables have more nutritional density; when selecting vegetables, your aim should be to get the biggest nutrient bang for your calorie buck. The ANDI index measures nutritional density, just as a stock market index tracks a broad spectrum of the market. To give you some concrete examples, cooked kale, turnip and collard greens get a score of 1000+, while French fries, at the opposite side of the scale, get a score of 7. Likewise, an S&P 500 index fund reveals its stock-density in its name.
In other words, investing all your retirement assets in a single company can be compared to devoting an entire meal to French fries. While it may be okay to indulge in fries every once in a while, a balanced diet is best in the long run—for both your health and your finances!
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July 27, 2017