Imagine having to fly a plane on a long trip. You are in a well-built plane, which has passed all the safety tests and can survive whatever weather is thrown at it.
Along the way there will be good weather and bad, tail and head winds, and turbulence. You will experience all of them but have no way of knowing when and to what extent.
You can land whenever you wish in the hope of avoiding unhelpful weather.
Would you land the plane or not? What questions would you ask yourself before deciding?
Here are some of mine:
1. How sure am I bad conditions are coming up?
2. If I am right, and they arrive soon, how will I know when they have passed?
3. If they do not arrive soon, how long do I wait before I take off again? Remember, I landed because I was sure bad conditions were just about to arrive, what has changed since I landed?
4. If I land and the conditions are bad, and I take off when they improve, how sure can I be I am better off than having just kept going.
5. What if conditions became a bit bad after I landed, but not as bad as I thought, and being on the ground has cost me time – how do I make that time up?
And here are my answers:
1. Probably 50:50 – not all grey clouds mean weather so bad it impedes my progress.
2. I cannot, it is a judgement call affected by the severity or otherwise of the weather that has just passed.
3. This is a dilemma – I have already been wrong quite recently, will my luck turn?
4. I can make a quick calculation to see how smart my decision was in retrospect. However, that is not helpful in future decisions, is it?
5. I am going to have to take more risks going forward to get back on track. Or make some compromise.
Let’s consider the different possible outcomes when deciding whether to land or not:
a) You might time your landings to perfection, and the take-offs that follow and arrive ahead of schedule after a very pleasant journey. Not what you expected when you took off, but you are very happy, you must be the best pilot on the planet.
b) Or your timing was not good. You could be stranded halfway, fearful about taking off again, or arrive very late, battered and bruised. Not what you expected when you took off and you are in a distinctly dark mood vowing never to fly again.
c) Or you might decide not to land and arrive more or less on schedule. Most of the trip would have been pleasant, as expected when you took off, and you are in a good mood.
On balance I would decide not to land. There is more uncertainty and risk in landing than not. I am comfortable that I have a good plane, and I will land more or less on schedule if I do not land.
And so it is with your financial plan and investment strategy. Put a good one together at the beginning and do not “land” (temporarily abandon your plan or strategy) and you are going to end up pretty pleased.
Very few think about their financial plan and investment strategy in these terms and that increases their chances of future regret. And avoiding future regret is what good financial planning is all about.