Investment Flight Path - Lessons at 38,000 Feet

“My name is Bill and I hate to fly!”

When on a plane, every bit of turbulence is magnified! I’m also an investment manager. The demons that scare me while in the air can be good lessons for investors. 

My family and I recently took a trip to the east coast during fall break. In doing so, I realized that there are many parallels between investing and flying.  So as you are reading this, perhaps you will want to cue up Gershwin’s Rhapsody in Blue (United Airlines) or imagine the “ding” from Southwest Airlines after each point.

Traffic Jams

Weather in one city can cause disruptions and delays in many cities.  When storms roll though Chicago, routes that go through O’Hare and Midway get backed up all the way from sea to shining sea.  (Sometimes delays in O’Hare happen for no apparent reason!)  When this happens, there are too many planes all wanting to get somewhere within a small window of time.  As a result, many passengers have their plans altered, derailed, and sometimes cancelled.  Only a few lucky people get through unharmed while everyone else suffers.

With investing, be careful of too many investors coming or going. Trying to buy a particular stock at the same time as everyone else, often results in paying too high of a price, and, consequently, poor returns.  Likewise trying to sell when everyone else is heading for the exits often results in irrationally low prices and, again, poor returns. 

Lesson:  Be a contrarian.  If everyone is buying, wait for the turbulence to pass and a better opportunity to present itself.  If everyone is selling, look for potential buying opportunities.  Do your research and be ready to buy at the right price.  Ding!

Successful Investors are Patient

While flying over the Ohio River Valley, it was remarkable to observe the winding path that rivers take.  What can be two miles as a crow flies can be ten miles as a river flows. The river meanders as if it has all the time in the world. Rivers are patient and, consequently, always end up where they need to go. 

Lesson:  Successful investing also requires patience.  When you lose patience, you take shortcuts.  Taking shortcuts can cause you to miss opportunities or ignore risks.  Ding!

Autopilot

While pilots need to be in the cockpit, they don’t always have to be flying the plane. Once they reach a cruising altitude and have the course programmed into the system, autopilot can take care of the work for quite a while.

There are also autopilots when it comes to investing. Target-date or age-based funds will manage your investments for you until you reach your destination. These types of funds are most common in retirement plans and 529 college savings plans.

Lesson:  If you don’t have the time, knowledge, or experience to manage your portfolio, target-date and age-based funds may be appropriate for you.  But, before using these autopilot investments, be sure to understand their strategies and expenses.  If you don’t, you may not end up at your desired destination.  Ding!

Turbulence and Volatility

While I hate turbulence, I understand that airplanes fly through turbulence as often as moving cars go over bumps in the road.  When risky investments experience turbulence, it is referred to as volatility. What do you do?  When you fly, you keep your seatbelt on.

Lesson:  As an investor, you need to understand that volatility should be expected. Keep your mind focused on the long-term and don’t overreact when the ride gets bumpy.  Ding!

Summary