Last week I took my two oldest kids (ages 10 and 8) to the ski slopes for the first time. They were brewing with excitement leading up to the big day, ready to conquer the mountain and get on the road to becoming ski pros. It all looked like fun right up until the moment when they were standing at the top of the Bunny Slope strapped into their rental skis. My words leading up to that moment about pizza wedges and snow plows seemed to be replaced with doubts of whether they’d be able to actually stop themselves from careening off the edge.
The first couple of runs were a bit rough as you would expect. My 10-year-old Caroline was in particular not having a great time. Even though she had only taken a few minor tumbles, as we stood at the bottom of the hill ready to take the “magic carpet ride” back up, she was visibly shaken. She was nervously gnawing on the fingers of her glove, breathing hard, and a tear was running down her cheeks.
At that moment it was Dad who was beginning to fill with doubts of whether she could press through her fears. I knew if she quit then that she’d likely not want to attempt it again. After some gentle prodding she pressed on, started to get the hang of it, and by the end of the day was comfortably cruising down the greens, only falling one more time throughout the day.
As I reflected on the day, learning to ski has a lot of similarities to the world of finance. And most of the lessons we learn (from skiing or money) are much more mental than they are anything else.
The enjoyment in skiing is from the satisfaction of mastering the mountain as well as the rush of the wind in your face and the slight terror that you’re constantly living on the edge of a disaster. It’s the risk that gives much of the reward. Investing is no different in that there is no reward without taking on any risk. In fact, in the “Parable of the Talents”, it was the steward who hid his money out of fear that the master labeled a wicked, lazy servant. God expects us to be productive with his resources, which inevitably requires us to take on risk. Not all risks are smart or worth taking, but to live a risk-free life (if that is even possible) is one with few rewards and few opportunities for faith.
I find this particularly true with clients contemplating retirement, starting a company, making a major purchase or investment, etc. We like to have all of the answers ahead of time, and it’s tempting to let fear of the unknown keep us from following God’s leading. That’s when we find ourselves staring up at the mountain, chewing on our glove and wondering if God will be able to hold us up if we step out of the boat.
Skiing would be a crazy endeavor if there were no way to put on the brakes. Whether it’s a pizza wedge or a graceful S-curve down the mountain, being able to control your speed keeps skiing from being reckless. My 8-year-old son Ford thought he had mastered this when he attempted his first Intermediate slope. It went from a bit comical to scary for Dad as I watched him pick up more and more speed down the slope. I realized he was going so fast that his pizza wedge wasn’t cutting it – he looked like he was being shot out of a cannon. Somehow he miraculously made it all the way down in one piece, but it got both of our hearts racing pretty fast.
There are lots of different brakes you can apply to your money. Whether it’s an emergency fund or adding bonds and cash to your investments, you can easily control the speed of your money. Trying to do so once you’ve already picked up speed can be dangerous. That’s why you have to know ahead of time how fast you’re comfortable going and to pick a strategy that will keep you from getting out of control.
Investing, like skiing, is part knowledge and part experience. It’s one thing to understand the concept of keeping your skis parallel and leaning into a curve, but it’s another thing altogether to pull it off. That’s why there are greens, blues and black diamonds. It’s a bit foolish for someone just starting out to try their luck on a black diamond slope, and this usually leads to injury, frustration, or both! Beginners who get fancy trying to slalom or pull off jumps are asking for a face-full of snow.
An investor faces the same challenges. You can understand in your head the relationship between risk and return, and get an idea of the stock market from watching MSNBC, but it’s another reality when you actually invest your money and live through the market gyrations.
There are lesser and greater degrees of sophistication as well – individual stocks, stock options, alternative investments, private placements, IPOS, etc. The lesson here should be obvious – if you don’t know what you’re doing, you can easily find yourself injured or frustrated financially. All of the investing “slopes” will take you down the mountain, so don’t try to push your limits.
The best ways to avoid injury during a crash is to be prepared for it and to know what to do when it happens. Learning how to fall gracefully can reduce injury and get you back on your feet faster. With your investments, this translates into having a pre-determined exit strategy. We don’t advocate market timing or selling out completely, so preparing to crash means taking some risk off the table when necessary (i.e before it heads south!). If you are preparing for retirement or another life change, make sure that you set aside plenty of investments that you can live off of and that won’t be subject to a stock market crash.
When you do crash, the worst thing you can do is decide that skiing is to hard and to attempt to walk the rest of the way down the mountain. That’s the equivalent of selling your stocks at the bottom after the crash. That’s the single worst thing you could do. We all want to buy low and sell high, so avoid the temptation to freak out when the markets go south and know that crashing is part of the adventure and the best thing to do is get back on your skis and continue the journey.
When you see a tree or a group of skiers ahead, they are much easier to avoid if you plan ahead. Trying to dodge an obstacle at the last minute is much more dangerous and harder to avoid.
If you know you have an upcoming financial obstacle such as a car purchase, a home repair or any other major purchase or challenge, plan accordingly. Either build up your cash to leave yourself some margin, or plan on pulling these funds from investments by making sure those funds aren’t invested in stocks. Preparing for these obstacles will keep your emotions and finances much healthier.
Again, investing, like skiing, can offer many great rewards and can be a great experience. If you want to talk over your situation and make sure that you have the right set of skis and are on the appropriate slope, just let us know and we’d be glad to help. Blessings on the journey!
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