Investment Metaphor #15: Composting

Composting and investing are similar in many ways:

The purpose of composting is to reinsert organic material into the ecosystem and biosphere. Likewise, one purpose of investing, besides the benefits to the individual investor, is to reinsert investment capital back into the economy as a whole. Organic material that we cultivate for food has effectively been removed from the ecosystem, which is part of the reason that farmers must use fertilization and crop-rotation method to ensure the long-term viability of their farmland. Similarly, invested money helps to ensure the long-term growth and stability of our economy by ensuring that capital is available and circulating to various industries and businesses.
Composting takes the right mix of ingredients. Efficient composting requires an ideal carbon-to-nitrogen (C:N) ratio of 25–30 parts carbon to 1 part nitrogen. If this ratio is not maintained, you will either get slowed decomposition and/or a stinky compost pile! Once you have the proper ratio of brown/green compostables in your compost pile, all you need is water and time to allow decomposition to take place and to have a nutrient-rich pile of compost ready to insert back into the ecosystem. Similarly, your investment portfolio requires the right mix of ingredients (stocks, bonds, cash) diversified in various ways. Just as you can selectively add ingredients to your compost pile to ensure the proper carbon-nitrogen ratio, you should rebalance your portfolio regularly to ensure that your portfolio contains the proper proportion of investments, depending on your investment strategy.
Composting and investing both take time. It takes time for organic matter to decompose into usable compost. Likewise, it takes time for your investments to produce a positive rate of return from the combination of compounding, growth, and income.
Just as you should keep adding new material into a compost pile (as you consume more organic material and as you remove compost for use in your garden) you should invest often by making regular contributions to your retirement investment accounts (for example, a Roth IRA or a 401k plan). Regular investing helps your portfolio to grow, just as regular additions to your compost pile help ensure a steady supply of ready-to-use compost over time.
Investing and composting are both activities that you can do from home. There is no need to buy fertilizer from a nursery or garden-supply store if you are producing your own compost. Likewise, if you are active in maintaining your own investment accounts (whether through portfolio rebalancing or through the establishment of an automatic investing plan), you do not need to shop or pay for financial services such as financial planning or broker services. Your investment plan can be as self-sustainable as your nutrient-rich garden!