Investing Requires Trade-Offs

When I give career counseling to my kids I have noticed a general trend. They all seem to want a career with a brain surgeon’s pay, banker’s hours, government worker’s security, and of course, easy college classes. My counsel often begins with an airplane analogy, which, as you can imagine is met with the expected “here we go again” eye roll. 

Launa and I love to visit our daughter in Dallas. The trip is about 1,000 miles, which happens to be close to the range limits of most small aircraft. In selecting an airplane most pilots want the same things: Long range, fast speeds and the ability to fill the seats with passengers. Unfortunately the laws of physics that govern flight make it extremely difficult to obtain all three. To travel long distances an aircraft needs to be able to carry a lot of fuel. Fuel is heavy so the wings and fuselage must be strengthened to hold the weight. Weight slows a plane down so it needs a bigger engine. The bigger engine adds more weight and burns more fuel, thus creating a vicious circle. If you add six people with luggage, the whole weight/range/speed issue becomes an engineering impossibility. In the end, the pilot has to decide what is most important and make trade-offs. Unsurprisingly, the rear seats of most small airplanes are rarely used.

Just about every investor who comes into my office wants the same three things: High returns, low risk and full liquidity. In truth, the laws of investing make obtaining all three at the same time virtually impossible. As with career choices and flying, investing is made up of trade-offs. Potential higher returns tend to come with higher levels of risk. Liquidity is nice but can sacrifice returns. Just compare the bank rates between a 90-day and five-year CD and you will see immediately that liquidity comes at a price. Low risk, high returns and full liquidity are all important to investors, but cannot be obtained at the same time. There have to be trade-offs.

My plane is fast, has a long range and can carry people in all six seats, but never all of those at the same time. With each flight I have to determine what is most important and make trade-offs. If I want speed and distance I leave people behind. If I want to carry people I leave fuel behind and stop more often.

When you visit with your financial advisor, come prepared to discuss what is most important to you. What do you want your money to do? Or as pilots say, “What is your mission?” Then select the appropriate trade-offs that will most likely fulfill that mission. The career discussion with my kids usually leads to them suggesting that the life of a CERTIFIED FINANCIAL PLANNER™ professional has all of the qualities they are after. But then, they were sound asleep at 3:30 a.m. this morning while I was researching some investment ideas for my clients. Everything has its trade-offs.