The traffic analogy of investments

One of the best ways to think about an investment is to see it as a vehicle that gets you from home to work. Now, a lot of people simply think, “Okay, which investment is going to get me there the fastest without crashing?” Right? In other words, is it going to yield a pretty good return, or is it going go to zero?

That’s a very simplistic way of thinking about any investment. But if you think about this analogy in terms of risk and return, your ability to get to work and earn an income is the return, and the risk is having an accident. Your aim isn’t just to make it to work once in the shortest time possible; you want to make it to work consistently. So you analyze not only the car itself, but how it moves in traffic, so you can have the best odds of getting to work safely every time.

To take this analogy further, if you think about stocks, individual stocks are like—well, let’s say they’re your personal car. And let’s say Uber is the new exchange-traded fund; it’s a new way of getting somewhere. But you also have the light rail, right? You have the BART system, which is kind of like a mutual fund or an index fund. So there are various ways to get where you’re going.

Now, you can beat an index, you can beat the traffic, but you’re going to have to take risks to do so. And that, to me, sometimes isn’t worth the trouble. You want to get there as consistently as possible, broadly speaking. And, of course, you always want to align these with your goals, such as, what time do you need to be there, and what time do you have to get ready, so you can take into fact that there are other things going on, on the road

Regardless of the vehicle, you should think about these concepts. You just always want to try to determine how confident you can be about investment X performing consistently and helping you achieve what you want. But like a car in traffic, performance is always relative to all the other things in your portfolio.