A few years ago, I bought a house for the first time. The downside to home ownership has included paying for a new roof, bathroom pipe replacements, and little things like insurance that make me appreciate how inexpensive my renter's insurance was. (If you rent and don't have insurance, consider getting it. Learn interesting things about all kinds of insurance in our spiffy Insurance Center.)
But there has been considerable upside to home ownership, too. Like my garden. In years past, I'd occasionally subscribe to a gardening magazine and swoon at various photographs of flowers. Now I'm growing some of my own flowers and can swoon every day as I gaze out my window or wander my grounds with a watering can in hand. As I learn more about gardening, I've noticed many parallels to investing. Permit me to share some with you; they may give you a few valuable insights into gardening -- or investing.
I know that many established companies return some excess earnings to shareholders in the form of dividends, which are incredibly powerful wealth generators.
Gardening pays dividends. So do plants, such as my blueberry bush, which should offer larger quantities each year. My plum tree is dropping little plums. Perennial plants come back and reward you year after year and often grow bigger in the process. That's the way companies such as General Electric
My more naive former self imagined gardeners simply planting seeds and watching plants grow. It doesn't always work that way, though. There's a lot of diversity in the garden. Some plants grow from seeds, others from bulbs, and so on. Some things that you plant today will sprout in a few days, and others won't break through the earth for many months. Some plants need lots of sun, while others like shade. Some want rich soil; others do well in poor soil. Some are annuals, some perennials.
Similarly, not all companies are alike. Even ones that may appear similar, such as book vendors Amazon.com
Avoid overcrowding and overdiversifying
You don't want to have too many stocks in your portfolio -- with too many, you'll have trouble following them all, and the ability of each to boost your portfolio will be diluted. Similarly, you don't want to crowd your garden. You need to leave room between plants for them to grow and expand, and so they don't overshadow other plants.
You don't want to underdiversify, either. If most of your net worth is tied up in your employer's stock and your employer was Enron, well ... you know the story. Similarly, if your estate boasts mainly one kind of tree or plant and that kind contracts some disease, you may be in for a flowerless, fruitless year.
Too much of a good thing
You can have too much of a good thing in both your portfolio and your garden. Like raspberries? So do I. But they grow on an invasive plant that can take over a lot of ground. You may want to vigilantly cut it back on a regular basis. Meanwhile, if one stock has grown to represent, say, 50% of your portfolio, you should probably prune that holding, too. It's served you very well, but you're taking on a lot of risk by pinning 50% of your growth expectations on one company.
Cut your losses
I always imagined gardening as a peaceful, harmless hobby. I've learned, though, that it can be cruel, and that it can even involve murder. I planted a lot of seeds in my basement this winter and began growing cute little seedlings as spring approached. But then I reread the directions and gasped. In each little pot, I'd dropped two or three or four seeds -- but once they began growing, I was to "pinch off" all but one! I had to snuff out many of the eager little lives that I'd nurtured so carefully. I did it, but I didn't enjoy it. (Next year, I may just plant one seed per seedling container and take my chances.)
In your portfolio, you also have to take some painful actions sometimes. You may love a company, but you need to look at its growth prospects objectively. Some of your poor performers may just be experiencing temporarily tough times. Others, though, are likely facing long-term troubles and should be sold.
That reminds me of how investing requires research. Buy and sell stocks on whims or blindly on others' advice, and you've got little control over your results, which aren't likely to be spectacular. Do some digging before you buy, and keep reading up on your holdings while you hold them. These days, many brokerages offer lots of free research reports on companies -- learn more about them in our Broker Center. (Did you know that some brokerages these days even offer $5 commissions?) Your friend the Fool also offers a lot of info on companies -- on our discussion boards, in our investing newsletters (which you can try for free), and our daily articles.
Research your plants, too. You want to plant them in the best spots and coordinate their colors, heights, and water and sun needs, among other things. If you have a deer problem in your area, perhaps seek plants that deer don't like. If you're going to plant artichokes, know that they can get pretty wide, so don't crowd them. A little research will pay off. (I was about to plant artichokes too close together, but then I happened to visit Thomas Jefferson's Monticello home, and on a tour of his gardens, I noted how big his artichoke plants were. Just in the nick of time.)
Gardens and portfolios require attention and maintenance, too. You need to prune plants, snip off dead flowers, and water and fertilize. If you're like me, you may also need to serve some beer to the local slugs every evening or two.
In your portfolio, you may want to regularly reinvest your dividends in additional shares of stock. You'll need to periodically rebalance your holdings, selling off parts of positions that have grown too large. You'll want to keep an eye out for new investment opportunities, too.
Pests in the garden
Finally, remember that both your earthly and financial gardens will harbor pests and dangers. Some dangers will come from outside -- slugs, cutworms, aphids, embezzling CFOs, rising fuel costs, slowing sales. Other dangers will come from inside -- from you: overwatering, underwatering, lack of fertilizer, greed, fear, inactivity, overactivity.
So what do you think of all this? Are there any other valuable parallels to draw between gardening and investing? Can you think of any other activities that share many features? Share your thoughts on our Fool News & Commentary discussion board or our Gardening and Landscaping board. Or just drop in to see what others are saying. Our discussion boards are great places to learn things.
Foolish research associate Katrina Chan updated this article, which was originally published on June 29, 2005, by Selena Maranjian. Selena owns shares of Amazon.com and eBay. The Motley Fool is Fools writing for Fools.