Brent asked me to review his latest newsletter.
He is a Certified Financial Planner. He said he was “Going
to make Portfolio theory understandable in two pages.”
That’s the kind of topic that can make my eyelids slam shut
so hard you can hear them reverberate down town.
So I agreed to read it. I assumed it would be from the
economist’s viewpoint and that it would feature the System 1 approach of neuromarketing.
In other words I figured it would be the old logic train of decision making.
Boy was I wrong.
He compared Portfolio theory to making salsa.
Stocks are the tomatoes. Bonds are the peppers and cash is
He told me, “If you leave out the peppers and onions all you
have is a bunch of chopped tomatoes. You have to have all three ingredients to
actually make salsa. It’s the same way with a portfolio. Too few bonds or the
wrong kind and there’s no zing. Cash? Not a lot required but it is an essential
I was awestruck. I asked him if the analogy would stretch to
how financial people keep saying it may be time to sell some bonds.
He started in talking about “style drift and then caught
himself. Starting over he said, “You can alter the ‘heat’ in your salsa by
using differing kinds of peppers. Some
are sweet and some peppers will burn your tongue off just looking at them.
Bonds have varying attributes as well. Bonds with longer maturities usually pay
higher interest rates than those with shorter maturities. In a normal bond market you can attempt to
generate predictable income from bonds by mixing a combination of maturities.
But these days, many portfolio managers have shortened the
average maturity of bonds in their portfolios in anticipation of higher
interest rates. BUT if a portfolio is maintaining the same distribution pattern
with shorter maturities, what have they done in the portfolio to maintain the
income level? This can lead to a more complicated discussion about credit
quality of the investments and use of derivatives within the portfolio that
will probably glaze your eyes over and diminish the enjoyment of the salsa.
Too few bonds means less ‘zing’ in the Portfolio salsa
We have to find a balance.
We trust that if we follow the recipe that the results over
time will be good.“
Reason: Understand the logic of the product or
Rhyme: Let’s you find the words, phrases, pictures
and music to get your ideal customer to hum along with your presentation.
Recipe: Is the analogy that will make it
understandable, explainable in user/customer/client terms and lead to referrals
Fletcher has the recipe for Start-ups, Professionals and Small businesses. See his
approach at www.JerryFletcher.com
speaks internationally. His speaking site is www.NetworkingNinja.com