Imagine an airplane pilot, flying at 39,000 feet on a crystal-clear day and suddenly hitting an unexpected pocket of turbulence, known creatively as “air pockets.” Although sudden turbulence occurs frequently it still creates excitement and demands your full attention. Air pockets are essentially turbulence on steroids; unforeseen events that leave you gasping for air.
Flying and investing have a lot in common. Aircrafts are built to handle sudden changes in altitude. Similarly, investment portfolios need to be constructed to weather unexpected turbulence in the markets. We can’t eliminate the natural instinct of fear and panic, but we can prepare for it and recognize the feeling for what it is, fleeting.
In the market, investors often focus on the upside and forget to look out on the horizon and answer, “What if? What if an air pocket sends me for a ride? Is my portfolio prepared? More importantly, am I psychologically ready?” At an investment conference I spoke with Steve Forbes who said, “Emotions are the enemy of successful investing.”
Taking the emotion out of investing is easier said than done, especially when the media focuses on uncertainty in the markets. The media’s primary objective is to draw you to headlines because their revenue is contracted through views, not by delivering useful or factual information. Media noise is designed to fire up emotions and investor emotion has been proven to influence how money flows in and out of the markets. If influenced in the wrong directions, at the wrong time, there is potential for reduced returns.
An experienced pilot prepares for every flight with a detailed pre-flight checklist. Managing investment risk with a disciplined investment process is just as critical. Prepare for the unexpected. This sounds very basic, but most investors are naturally reactive, not proactive. It’s just how we’re wired.
The ongoing risk management questions that investors should be asking are, “What is my risk budget?” and “How do my assets react to air pockets?” We have a free Portfolio Risk Analysis tool on our website and it takes less than five minutes to know your personal risk number. Not knowing your risk number is like a pilot taking off without a detailed checklist.
Advisory services offered through EWG Elevate, Inc. dba Protection Point Advisors.
This represents a partial list of clients. They have not been compensated and were not selected based on duration, performance, account size.