Investing is Like Baking: You Need to Find the Right Mix

Ever since I can remember, I’ve always enjoyed making baked goods at home. I love trying new recipes and sharing the end product with family, friends, and colleagues. A couple of years ago, I attended a creative baking class where we learned the science behind baking and even created our own recipes. Having been a portfolio manager for over 15 years, I couldn’t help but see the similarities between baking and investment management. Balance, patience, and precision are key tenets of both subjects and just like in baking, investing requires the right mix of ingredients to achieve the desired outcome.

Let’s take a deeper look at four standard baking ingredients: flour, sugar, eggs, and salt.

Flour

Whether you’re baking bread, cookies, or a cake, flour is the main ingredient, providing stability and structure. In an investment portfolio, the fixed income allocation provides this stability. Fixed income can reduce the overall portfolio volatility and smooth the ride for investors.

Sugar

Every baked good needs a bit of sweetness and that’s where sugar comes in. The “sugar” in our portfolios is the growth assets like equities which bring those sweet returns. Equities have the potential to earn higher returns than fixed income and allow portfolios to grow faster than the rate of inflation, but also come with additional risk. In the chart below, notice the relatively steady returns of T-Bills and corporate bonds, compared to large and small cap stocks. Although these returns may be enticing, just as in baking, you can have too much of a good thing. When sugar is not used in the correct proportions for your recipe, it can negatively affect the flavor and may also damage the structure of the baked good, causing it to crumble.

Eggs

Eggs have the job of binding all the ingredients together, and in a portfolio, mutual funds and ETFs serve as the binding agents, grouping individual investments together to create a diversified portfolio. In our Bragg Financial portfolios, we typically use a mix of both actively managed mutual funds and passive ETFs across the asset allocation to provide exposure to large-, mid-, and small-cap stocks, foreign equities (developed and emerging markets), short-term bonds, intermediate bonds, and high-yield bonds. In the chart below, each asset class has a different colored tile. I realize this is a busy-looking chart, but you don’t even need to read the words to grasp the concept. If you squint your eyes and focus on one color tile at a time, you’ll notice how the tiles change position from year to year, with widely varying returns. The white tiles throughout the middle represent a diversified portfolio, encompassing all of the asset classes. As you can see, by holding a diversified portfolio, the impact of any single asset class is reduced, providing a smoother ride for investors.

Salt

In baking, salt is the balancer of flavor and with investments it’s risk management. Just as you aim for the perfect balance in baking, you must also find the right level of risk in investing. Too much risk and your portfolio could be subject to excess volatility while too little risk may not provide the intended returns. Here at Bragg Financial, we manage risk by helping our clients find the right asset allocation mix between equities and fixed income, as well as selecting appropriate securities within those asset classes.

Follow the Recipe

Just as you may follow a trusted family recipe, investors should stick to their investment plan. There may be times when you question the plan because of outside information (i.e., tariff talk, geopolitical instability, or concerns about inflation) but it’s important to stay the course. The two charts below will help to illustrate this point. In the first chart, you’ll see the University of Michigan Consumer Sentiment Index plotted across time with blue dots signifying the peaks and troughs. During times of uncertainty, investors may feel the need to reduce their risk by selling stocks, but attempting to time the market can be a costly mistake. On average, those investors who purchased at consumer confidence highs earned a return of 3.5%, while those investors who purchased at consumer confidence lows earned 24.1%.

The next chart illustrates each year since 1980 when the S&P 500 experienced a pullback. Market pullbacks and corrections—declines of 10% or more—are normal and have occurred in 25 of the last 44 years. However, almost 75% of the years when the S&P 500 experienced a decline, it ended the year with positive returns.

When market news, political uncertainty, and the U.S. economy are top of mind for many investors, it’s important to look at the historical data and avoid making emotional decisions. We’re here to remind you to stay calm and follow the recipe.

Bragg Financial is like your own personal pastry chef, and we’re here to craft a delicacy that’s been tailored just for you and your needs. In uncertain times, we’re here to reassure you to stay the course and help you achieve your financial goals—big and small.

If you’re in the mood for a treat, check out the recipe I made for my creative baking class, which was a cookie inspired by the brunch classic Chicken & Waffles.

This information is believed to be accurate at the time of publication but should not be used as specific investment or tax advice as opinions and legislation are subject to change. You should always consult your tax professional or other advisors before acting on the ideas presented here.