Starting to invest can be overwhelming for many people. It can be comforting to liken it to the process of baking a cake. In this blog you’ll learn the first things you need to do if you are taking your first steps in investing.

Welcome to the Investment Bakery

It all starts with an investment recipe. You can’t start investing successfully without having an investment roadmap and an action plan. You wouldn’t start baking a cake without the right recipe, unless you were a pastry chef. For most of us, this is not the case.

Most of the time, investment management platforms encourage investors to go about investing without a high emphasis on their overall, long term investment process (i.e. the investment recipe.) Instead, the focus is on a plan that collects your money (and fees).

The investment process usually followed is this:

  • Save money into some special accounts with guaranteed low yields, which is the equivalent of buying some very basic ingredients to bake a cake
  • Find a portfolio for your risk appetite, which is the equivalent of finding a recipe that will likely match the style of cakes you want
  • Gradually invest into your portfolio, which is the equivalent of using whatever ingredients you can find to bake that cake (make it up as you go along)

The problem with “making it up as you go along”, so to speak, is that the investment process lacks discipline and consistency. Imagine if you were to bake a cake and decided halfway through the process that you want to make it gluten free. Or you found out some ingredients had expired, and you already mixed the ingredients together two steps ago. It’s too late, the cake is going to be a disaster and there’s no going back!

Instead the right investment sequence should go like this:

  • Find a portfolio with all the right investment options for you. Find the recipe that will make it possible for you to bake the perfect cake with all the right ingredients
  • Put money into that portfolio. Buy all the right ingredients for that perfect recipe
  • Allocate and Invest. Measure out each of the ingredients and mix them together following the recipe
  • Et voila! Let your investment portfolio grow and deliver financial returns. Bake your perfect cake and serve it to impress your friends and family (and yourself)

In conclusion, there are many similarities between baking a cake and investing successfully:

  • There must be a recipe (roadmap) that you will need to follow. It should provide a clear course of action from start to finish
    You will need the right amount of ingredients (money allocation for investment)
  • Good ingredients with the right recipe will likely deliver a better cake (portfolio returns)
  • You could bake from scratch without a recipe and create all the steps yourself (more time consuming), but the likelihood for disaster would be high. Or you could opt for ready-made recipes from a pastry chef (financial platform) that require only some minimal cooking skills from you to get started.

Not as overwhelming, is it? So let’s review all those steps in greater details if you are starting to invest for the first time.

Buying the ingredients
(money allocation for investment)

Before you start to put your money to work in market-based investments that are subject to significant fluctuation, let’s start with the basics. Just like you wouldn’t bake a cake without greasing the pan and measuring out the flour first before mixing up the ingredients, you’ve got to make sure a few of the elementary facets of investing are in place.

The first stepping stone is to make sure that you have enough savings in place so that if something were to happen and put a stop to your cash flow, you would still be able to support daily life (and eat!). As a general rule of thumb, it is recommended to stash away 3 to 6 months of cash in an account that is held totally separate from your investment portfolio. You may need more than this depending upon factors such as your level of expenses and how many dependents you have, if any.

For general guidelines, read our blog “How much savings should I have?”

Leaving a huge wad of cash in a checking account may sacrifice your ability to keep up with the rate of inflation. What options are there if you want to reap some return on your cash balance without subjecting it to substantial risk?

Read our blog here on “Savings and CDs” to learn about some different choices you may have.

Finding your investment “recipe”
(your portfolio)

Once you’ve saved up enough cash in your “emergency fund,” the task becomes designing the recipe for your first investment. As you do so, here are a few questions you should consider:

    What’s my appetite for risk?

    Do I want to pursue the type of cake that is relatively simple and straightforward to bake with little potential for deviation from the course? Or, am I looking for something more challenging with potential for higher rewards and better taste, and if so, am I willing to accept the difficulty and uncertainty that comes along with this?

    To put this into investment terms, think of investing as a spectrum. On the extreme left side of the spectrum, you have fixed income options such as bonds and fixed deposit accounts (CDs). These will bring you a set amount of interest on a pre-defined basis. As you move along the spectrum and increase risk, you increase the variability of your income. Furthest to the right you have equities (also called stocks) which will provide you with partial ownership of a business.

    How much skill and personal time do I need to start this?

    Am I the person who wants to research all the ingredients, buy them myself, mix them together, pour the batter into the pan and watch it bake in the oven? Or, am I more the type who would prefer to buy the pre-made cake mix, throw in some eggs, bake it and frost it with some frosting from a tube?

    Just like in any recipe, there are a variety of different ingredients that go into baking the cake. You’ll want to diversity your investments, picking different types of vehicles from the spectrum mentioned above. That way you’ll avoid burning the cake, akin to having a huge crash in your portfolio if one of the investments is having a tough time in the market. What if the milk spoils? What if you crack and egg on the floor instead of getting it into the mixing bowl? No worries, that’s only a small portion of the ingredients and your portfolio will survive just fine.

Baking your Cake successfully

Having the perfect recipe and the right ingredients are a great foundation, but you also need to mix all the ingredients in a jar and program the right timing and temperature into the oven. Or you could hire a pastry chef that will do it all for you.

There are several different places where you can buy your ingredients and mix them before they go to the oven at the right temperature, that is where to house and invest in your investment portfolio. The options below will help you achieve the perfect cake:

  • You could establish an account at an asset management firm and invest through their platform. In many cases you’d be offered a variety of individual securities as well as collective investments such as mutual funds or ETFs. You pay a commission to the platform that holds the securities when you make a trade. In most cases you will need to construct the portfolio yourself, or buy model portfolios with very generic risk appetites: conservative, neutral, aggressive. These generic portfolios are usually free on investment platforms, but the more successful ones might have an advisor fee attached to them or a licensing cost in the case of a Direct Indexing portfolio. See our blog here on “Direct Indexing”.
  • You could sign up for a digital platform (roboadvisor) that would handle the portfolio construction for you, and invest your money after you provided inputs about yourself in a quick Q&A session. In most cases, there is minimal involvement required after you provide the initial information. The platform itself conducts the research, the investment and portfolio rebalancing to make sure you stay in line with the investment “recipe.” In exchange for all this, you’d pay a simple monthly fee for subscribing to the digital platform.

Structuring the process this way has numerous advantages, namely higher efficiency and better organization. This is the approach that WealthVenue follows; we make investing easy and simple because we feel that it benefits our clients, most of whom don’t have time for inefficiency. To learn more or to get started baking your first batch, go to our signup page and start investing like you would bake a cake.