How Buying Clothing is Like Investing
May 29, 2014Last week, I wrote about how I was able to buy a new set of clothes without breaking the bank. In the process, I realized something else too. It turns out that putting together a wardrobe is a very similar to putting together an investment portfolio. Here are some lessons I learned and how they apply to investing:
1) Don’t be afraid to ask for help. While I didn’t end up going with the stylist’s recommendations, I did learn a lot that I could apply when choosing my own clothes. A financial planner can serve the same function for your investments, whether you decide to hire them or just learn from their expertise. I also decided to pay for the stylist’s time rather than work for with someone who might try to sell me over-priced clothes for a commission. Likewise, look for financial planners who don’t work on commission. Your employer might offer access to an unbiased financial planner or you can hire a fee-only financial advisor through organizations like NAPFA, the Garrett Planning Network, and the Alliance of Comprehensive Advisors.
2) Keep it simple. When you first start building a wardrobe, you want to stick to the basics, which are more versatile and less likely to go out of style. In the same way, when you first start investing, stick to the basics of stocks, bonds, and cash. Even sophisticated investors are probably better off without more esoteric “alternative” investments like commodities and hedge funds.
3) Build an “all-weather” wardrobe/portfolio. With clothing, that means being able to cover the whole spectrum of situations and temperatures. You don’t want to have all business suits or just jeans and t-shirts. In investing, that means being similarly diversified with different asset classes for various market cycles. One easy way to do that is with a target date fund or balanced fund that’s already fully-diversified so you don’t have to make decisions like how much to put in large cap versus small cap stocks.
4) Make sure it’s the right fit. One thing I learned from the stylist is the importance of fit and how some brands fit my particular body type better than others. In the same way, your investment portfolio needs to match your particular goals and comfort with risk. If you use a target date fund or balanced fund, make sure it fits your risk tolerance. You can also use a tool like Financial Engines or FutureAdvisor for a more customized portfolio.
5) Shop around for value. Once you know what you want, see if you can find the same thing or something similar for a lower cost. In the investment world, most actively managed mutual funds are just over-priced “closet” index funds. You might as well follow Warren Buffett’s advice and buy real index funds, which tend to beat more expensive actively managed funds in the long run.
If you can be a savvy shopper, you can certainly be a savvy investor too. In fact, investing is arguably a lot easier. After all, you don’t have to go anywhere, try things on, or stand in long lines. With a phone call or a few clicks, you can get started on the path to investment success. If only, clothes shopping was like that!