Common Investor Analogies Explained

Interviewer:
Joining us now to break down some of the popular analogies that investors like to throw around is Kim Inglis, senior portfolio manager with Raymond James. Well, Kim, let's start with that. Don't put all your eggs in one basket. Could you walk us through this one? And why it can be especially important during concentrated markets? 

Kim Inglis:
Yeah, so don't put all your eggs in one basket is essentially the notion of diversification, which I'm sure everyone understands why that is beneficial. But where I find people, what people do with that analogy is they tend to think that it just means how a whole bunch of holdings. But if you have a large number of holdings, but they all happen to be in, say, the same sector or the same area of the world or something along those lines, then you're not truly diversified. So instead, you want to take that notion and you want to actually diversify yourself through different asset classes, through sector, through geography, through different styles, so value, growth, and even using different portfolio managers within your portfolio can help with that diversification. And if you end up successful with that notion of don't put all your eggs in one basket, then ultimately, you'll end up with a portfolio that will have a smoother return profile, lower volatility, and my own analogy is, I guess, a better sleep at night factor. 

Interviewer:
Yes, always an important factor. Now, next we have a portfolio is like a bar of soap. The more you touch it, the smaller it gets. I'm guessing this one has to do with the importance of staying invested. 

Kim Inglis:
Yeah, so we've heard this one a lot from me. It's one of my favorite ones. And it's essentially the idea that people, especially in these markets where they're quite volatile, people have a hard time doing nothing. They feel that they need to get really active with their portfolios. But the problem with that is that oftentimes they end up doing all the wrong things at the wrong time. They're selling at the bottom and buying at the top and that sort of thing. And during really volatile markets where there's panic selling, that's the time where you actually want to be doing the exact opposite. You want to be basically doing nothing sitting on your hands. And that's really-- because it's the notion of timing the market. It's just impossible. You might get it right once or twice, maybe getting out before some volatility. But the problem is that it's hard to get back in when the markets are still really fearful. But meanwhile, a good chunk of the returns come in the first 60 days after a bear market low. So it's really important for people to try and keep that in mind. 

Interviewer:
What about the cookie analogy and the pain of someone taking your cookie away? I know this can be especially painful for my daughter. But what does it mean in the context of markets? 

Kim Inglis:
Hey, so it's painful for me too. I like my cookies. But the cookie monster is a terrible beast. It's the idea that it's really painful. It's more painful for people when the cookie monster comes and gobbles up all your cookies and takes all of your cookies. It's less painful. It's less painful the joy of excitement that people would get out of getting an extra cookie. Essentially, the notion that people feel pain from cookies or what have you two times worse than they do the joy of gain. So that's essentially the cookie analogy. And how that relates to the market is you've got a lot of people who are fearful of the stock market. And they say, I don't want to invest in the stock market because I don't want to lose all my money. I'm really scared about that. But when you look at what the stock market has done over history, the S&P 500 as an example, 100 or so years of data there has done about 10%. That's a lot of money, especially compounded over time, that people are losing out on due to irrational fear. So the moral of the story, essentially, is don't let the cookie monster run your finances. 

Interviewer:
And another one we tend to hear during turbulent times is, this time is different. This time is different. What do people mean when they say this? 

Kim Inglis:
Yeah. Without fail, anytime it's volatile or there is a market crash happening, I will hear that. I would be a very rich woman if I had a dollar for every time if someone said that. And what I can say with that is, this time is never different. The cause of market volatility and the cause of market crashes and that sort of thing, those are always different. The more recent chaos is very different from financial crisis, different from COVID, different from dot com. You name it, the causes are always different. But the outcome is always the same. And that's that market's rebound. And actually, a good analogy to go along with that actually comes from a famous investor named Jeremy Grantham. And what he described is essentially picture yourself standing on the top of a building in the middle of a hurricane holding a bag of feathers. I'm not entirely sure why you'd be doing that. But let's say you are. And you release that bag of feathers over the short term. Of course, nobody knows what's going on with those feathers. They're going to go up down all around. You don't know how high they're going to go, how far they're going to go. But there's one absolute certainty. And that's that eventually gravity takes hold and those feathers come back down to the ground. So over the short term, there are some unknowns. But over the long term, there is an absolute known. And that's the same as the markets. The over the short term, it can move any which direction. But over the long term, there is an absolute certainty. And that is that markets rebound. 

Interviewer:
And going back to this idea that this time is different. This time is different. What's the best way to potentially overcome some of those thinking? 

Kim Inglis:
Yeah, so I would say that the best thing someone can do for themselves is get a financial plan. And that's because it will really, when done properly, really assess things thoroughly. It'll pressure test things. It will run worst case scenarios to really help you understand how you're actually impacted by some of these market moving events, just as one example. It can tell people how much they're able to spend, how much return they actually need to make on their portfolios, oftentimes I meet with people. And they're entering retirement, or they're already in retirement. And they're very fearful of running out of their money. So when times of volatility come up, they get extra fearful with that. But when you run their financial plan and you run the analysis, oftentimes these people think that they need to be getting 10% a year just to be able to survive retirement. But often, I see them and they need maybe 1% or 2%. So it takes a lot of that fear over the market volatility when you actually have that knowledge. It can help you move forward with a lot more confidence. And it can also help you tune out some of the noise that can make you do bad things. 

Interviewer:
Well, Kim, always great to have you with us. Thanks so much. 

Kim Inglis:
Thanks for having me. 

Interviewer:
And thank you for watching. Once again, that was Kim Inglis with Raymond James. I'm your host Jenna Dagenhart with Asset TV.