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My favorite hobby is gardening, and much of what I know about plants I learned through trial and error. I’m also a Certified Financial Planner, and that’s helped me recognize the many parallels between growing your garden and growing your money.
Gardening teaches valuable lessons about wealth management. You see the importance of patience, cost efficiency and diversification while you get your hands dirty and make your world a more beautiful place. With both gardening and investing, doing things correctly brings immense satisfaction and peace of mind. And both can give you returns that increase as the years go by.
Here’s how habits learned toiling in the soil can bring much abundance to your financial garden as well.
Getting rich quick does not work. The same can be said for “instant gardening.”
Some people view plants and trees as pieces of furniture to be moved on a whim. They buy large specimens with no consideration of their growth potential. Soon, the space they’d hoped to someday see in Better Homes and Gardens has become an expensive, overcrowded mess.
What’s lacking here is patience. Rather than buy small specimens with vibrant roots and give them the room (and time) they need to grow, the instant gardener goes for immediate gratification. This is no different from an investor who discards the time-proven method of dollar cost averaging in retirement plans and instead goes all-in on the flashy Next Big Thing.
Instead of simply letting nature take its course with help from the miracle fertilizer of compound interest, the instant gardening approach is allowed to overrun the landscape. Trying to create a portfolio in a few years to replace slow and steady growth over a 30-year period seldom ends well.
From a simple acorn, a mighty oak will grow to provide protection from the sun for many years. But you have to give it time to flourish. Constantly replacing the tree, or digging it up to check its progress, negates the most important factor in gardening and investing: a long time horizon.
Gardening teaches that the most expensive product is not necessarily the best.
Investment costs are the largest factor in the performance of an investment. Buying something very expensive that you do not understand is a recipe for disaster.
Imagine purchasing an expensive and delicate tropical orchid with no idea how to care for it. That poor thing will wilt and die before long. Myself, I prefer wildflowers. They require little maintenance, come in a wide array of colors and are relatively inexpensive. The best part is that they self-sow. They drop seeds each year, and in the spring you find many volunteers springing up in places they will thrive. It’s kind of like collecting dividends.
Buying stock and then harvesting increasing dividends each year is a terrific feeling. The idea that your investment is now paying you makes it all the more enjoyable. Over time, half of the market’s return is determined by dividends.
Real investments contribute money to you, not the other way around. If you are paying increasing amounts of money each year on your assets, it would be a stretch to call these investments.
Finally, the most beautiful gardens include a wide array of species. Some flowers grow in mounds. Others climb on vines. Some varieties may be strongly vertical, while others spread out as groundcover. Other plants are valued just for their leaves. There are trees for fruit and trees that stay evergreen for winter interest. Some plants thrive in the shade, while others require all-day sun.
If you planted only one variety, you would not have a garden that provides benefits in all seasons. The same can be said for your investments.
A diversified portfolio should contain many different types of stocks, both foreign and domestic, as well as a splash of real estate. It also needs a good portion of high-quality bonds to protect you from the unpredictable but inevitable financial storms.
Without this diversity, your portfolio could wither and die. Having all stocks or all bonds would be very similar to the garden without variety. It will not work.
Not everyone can be a gardener — or an investor, for that matter. If you are impatient, easily influenced by showiness and love to follow the crowd, you would be better off to outsource both your landscaping and your portfolio. If you are lucky enough to have an interest and aptitude for both, don’t be surprised if you start to see dollars spring up from your marigold patch.
Image via iStock.