Is there a difference between investing and planning? Most people confuse the two or inevitably put more emphasis on investing because that is what they can see. Let’s face it, investing is more fun to talk about than planning. Plans, even though on paper or in your head, aren’t generally seen as clearly as statement balances. Investments can be converted into spendable money … plans can not. There’s a problem with this confusion as I trust you’ll see by the end of this post.
Imagine investing through structuring the portfolio allocation like building up the various bundles within a cable. Each company would be represented by a single strand inside each bundle. Each bundle would represent companies with common characteristics such as a bundle composed of large companies, another bundle of small companies, then value companies, growth companies, U.S. only (headquarters in U.S.) companies, international only. These bundles are primarily bundles “strands” represented by stocks. Other bundles could be composed of bond strands: long term bonds, intermediate term bonds, short term bonds, U.S. bonds, international bonds, etc.. Other bundles could be composed of other types of investments with common characteristics as well – I won’t list them all since the point from the metaphor is bundling common characteristics into bundles.
All the bundles bundled together would represent your overall portfolio allocation construction.
You can’t see the bridge for the cable. Being so focused on the money part hides the reason for the focus and that purpose gets lost. Most people build cables for cables sake!
The purpose of the cable is to hold up the bridge … in other words, to support the plan. And the cable should be designed to hold up the bridge in not only good weather, but the worst of weather.
What is the bridge for? To get to the other side of course! To get you from where you are to where you want to go. If that wasn’t important, there wouldn’t be a bridge there! You build the bridge because it is important – it is somewhere you want to get to. However, most people lose sight of that during the cable construction phase and can’t see the bridge for the cable. The plan is the bridge … it is what gets you from where you are with money to where you want to get to with that money.
Moral of the story: Stay focused on the purpose – that would be the bridge, not the cable!
Another metaphor from my days as a USAF pilot … investing is the fuel that powers the plan.