I love using analogies. I use them all the time in my personal and professional life.
It’s just easier for me to grasp concepts and thoughts if I can relate them to something that I already understand.
So, let’s use an analogy today with investments. My friend, Josh Mellberg (a nationally recognized financial Planner), recently shared this analogy with me.
Imagine you go into a car dealership thinking that they sell many different makes and models of new cars. A salesman walks up to you and you tell him that your priorities in buying a car are: 1. The car must be very safe and secure; 2. The car has to easily handle different challenging conditions, like very hot and cold weather, snow, and ice, etc; 3. The car needs to carry a lot of passengers and have cargo space.
The salesman tells you that he knows exactly what you need. He comes back with a beautiful shiny red Porsche convertible. The salesperson is smiling and very excited. He does everything he can to convince you to buy the Porsche sports car. The salesperson is friendly and self-confident.
You are thinking to yourself, “I like this guy and that is a beautiful car. However, I don’t know if that’s the car for me. That is definitely not the car I asked for. It doesn’t fulfill my priorities.”
You’re a little confused, because the salesperson told you he has a lot of experience selling cars and that he is highly trained.
“Maybe he knows what is best for me,” you think to yourself.
However, you decide to tell the salesperson that the car doesn’t fit all your priorities. The salesperson says, “Now I understand what you need. Let me bring you another car that will be what you want.” He comes back with a beautiful shiny blue Porsche convertible.
Now you are even more confused. You say, “I don’t understand how this sports car is different from the last one.”
The salesman says, “This car is way different.”
You decide to question him, “How safe is this car?”
The salesman says, “I selected a car with a high roll bar and extra air bags. If the car flips over, you should be OK because of the roll bar. The combination of the roll bar and extra air bags make this car super-safe.”
You decide to question him further, “Remember, I have a family and I like to take long vacations and we carry a lot of cargo. This car is a two-seater and has only a tiny amount of space for storage.”
The salesman answers, “Not a problem. For an additional fee, I had a trailer hitch installed on the back bumper.”
Still not satisfied, you ask, “How will this car drive through snow and ice?”
He responds, “I went ahead and threw in a pair of snow chains.”
Frustrated that the salesperson didn’t listen to your needs and priorities, you walk out. As you are leaving, you look up at the sign overhead and realize that you didn’t go to a large dealership offering a wide variety of cars from different manufacturers. You had walked into a Porsche dealership!
You now understand why this nice salesperson kept offering you Porsches. It is because that is all he has. He works for Porsche, and he can only offer what they produce.
Sometimes, people will come to the realization that the advisor they are working with only sells stocks or mutual funds. When they try to explain to the advisor that this doesn’t meet their safety needs, the advisor will likely offer them a “diversified portfolio.”
This diversified portfolio may seem similar to the car salesman’s efforts to try and add on diversified pieces such as extra air bags, a roll bar, a trailer hitch, and snow chains to satisfy you that a Porsche sports car will satisfy your needs for safety, and security, and carry a lot of cargo.
The car salesman’s “solutions” didn’t meet your needs, and maybe your advisors recommendations aren’t either.
Many retirees have told us that the solutions offered by their advisors seemed logical at the time, but proved to be not in their best interests during all market conditions.
Using this car analogy, ask yourself if your advisor is selling you the right car (financial plan), or just adding patches to make it look like the right financial plan.