For movie buffs like me, summertime is the best season of the year because normally Hollywood chooses to release the large “blockbuster” films during the warm months. One can speculate about the possible reasons for this, but it is a phenomenon that has existed since Jaws debuted in the summer of 1975.
Recently, when describing investing to an investor, I used a movie analogy. Turns out she was a fellow movie lover, so it made perfect sense to her. This analogy made a complex topic very simple for her, and I am hoping it will do the same for you.
The first thing to consider when planning a trip to the local theatre is what dollar amount you are comfortable spending. If cost is not a concern, one will likely choose the theatre with the nicest bells and whistles – surround sound, best concessions, etc. However, if budget entertainment is your goal, perhaps the $1 theatre is the answer. You won’t find the newest movies there, but the price is right.
The investing parallel is “how much money will you invest,” and “what percentage of that money will you need immediately to maintain your lifestyle versus investing for your future?”
WHO TO INVITE
Will this movie trip be a group endeavor, or just a Father-Son experience? Or perhaps, you would like to spend some quality time with your significant other. Regardless, whom you choose to attend the movie with is important.
In the investment landscape, every person should ask themselves “who am I investing for?” Although this seems to be obvious to some (“me, of course”), many times the answer is not as blatant as one might think. Depending on circumstances, people could invest money for everyone BUT themselves (kids, grandkids, spouse, their Alma Mater, etc.). Who the money is invested for could completely change the risk parameters.
Furthermore, many times husbands and wives have different appetites for risk. She likes “chick flicks,” and he enjoys action movies, so maybe they compromise on a drama. Investment portfolios need to be similarly structured.
Would you rather attend a G-rated Pixar movie, or an R-rated action flick? For some people, ratings are not as important as content, but for others, it can be a deal breaker. Different people have various comfort levels with all types of movies, and that decision is a very personal one.
Here we consider the four-letter word RISK. Think of attending “Toy Story” as a very low-risk movie. It is entertaining but there is little chance anyone will be offended. On the other hand, “BORAT” is outrageously funny and to some, completely offensive. Those who stick it out until the end may leave enlightened and entertained, while others will walk out of the theater before the show is even over.
Some investment choices can offer a smooth ride with little risk and everyone can be comfortable. Others may have potential for a big pay off, but the ups and downs may keep some people from seeing it to the end. It may be too violent or present doubts that the good guy is going to win.
In a well thought-out financial plan, a good ending is certainly the desired result. If the planner has identified how much to invest, who the money is being invested for, then they can choose appropriate investments according to your tolerance for risk. Just like going to the movies, you need to know in advance what your style is and what will keep you in the theater. Those who favor a riskier strategy need to know that there could be some scary parts, and that you may miss a really good ending if you leave too early.
Our job is to be your VIP movie host. “Is the lighting okay? How are your sightlines? I brought you a large Diet Coke. Do you prefer your popcorn with or without butter? You look cold, here is a blanket. A scary part if coming up, may I cover your eyes for you?” You get the picture. Our job is to keep…you…at…the…movie.