I am not a big fan of roller coasters. Perhaps it’s my age. Maybe it’s the meaningful volatility I face each day in the capital markets. Whatever the reason, I am not a big fan of roller coasters.
Imagine my family’s surprise then, when I agreed to join them on the “California Screamin’” coaster in Disneyland. As you can see in the picture above, this roller coaster is not the most extreme coaster in the world, but it is well above my comfort level. So why did I agree to this self-inflicted terror?
It was simple misunderstanding. At the entrance of the ride there appeared to be two rides: one small, non-scary looking thing and the other big, scary “California Screamin’.” I truly thought we were going on the smaller ride, until we got on board. The ride began with a massive acceleration followed by a rather high peak and subsequent plunge. At this point, I knew I was in big trouble, because up ahead I saw the big peak of the ride. Did I mention that I’m not a big fan of high places either?
So faced with this double whammy of phobias I did what I always do to combat stress, I began generating alpha waves. In college I underwent some biofeedback training and learned how to generate alpha waves to improve my meditation skills and to deal with stress. So, as I approached the apex of Mickey’s torture machine, my eyes were lightly closed, my breath deep and smooth and my face of picture of meditative serenity.
The rest of the ride was inconsequential. I recall many loops and twists, ups and downs; we even went upside down at one point. All the while, my little brain just kept on pumping out those alpha waves. At this point, the reader might be wondering if this is some kind of “Tall Tale” with a jokey punch line. I assure you, it is not.
At the end of the ride, a camera snapped a picture of our family as we neared the end of the ride. My wife looks like she’s having the time of her life – hair blowing in the wind with a huge smile on her beautiful face. Behind us are Ben, whose eyes and mouth are wide open in mock terror (like his dad, he is a big fan of irony) and Matt, whose face is all scrunched up from laughter. He too looks like he’s having the big time ever. Then there’s me. Face calm, lips pursed into a slight, knowing smile, eyes peering steadily into the camera as if to say “Ha ha – you did not scare me!” [Disney copyright rules prevented me from sharing the photo, but trust me – it is a classic]
So what does this have to do with investing? For one, I think I now understand why I can maintain a reasonably stoic demeanor in the face of market volatility. Back in 2008-2009 when everyone seemed to be panicking, I was able to provide perspective, comfort and useful advice to our clients and my colleagues. I may not have been aware that I was using biofeedback to maintain my composure during those challenging days, but I guess I was.
Second, amusement park ride volatility is by design fun (for most), but capital market volatility is fun for no one. We like a good scare every now and then, whether it be at a horror flick or a roller coaster ride, and this is probably healthy and cathartic. Being afraid that you will not be able afford retirement due to market volatility is a scare no one should have to face. In my view, market volatility in and of itself is not that damaging (no fun, clearly); it is our response to it that can have lasting effects to our detriment.
Selling at the bottom and buying at the top are two strategies guaranteed to reduce one’s ability to reach long-term financial goals. We saw a lot of selling in late 2008 and early 2009. Some of those people may still be hoarding cash either waiting for a pullback or some other signal that “all is clear.” Now, we are hearing about a lot of people wanting to increase equity exposure. I have no idea whether we are close to the peak or not, but I do know that increasing one’s equity weighting based on how one feels about the market is probably an unwise move. Asset allocation, in my view, should reflect the intersection of one’s risk tolerance and need for portfolio growth, not one’s views on the stock and bond market. Changing one’s asset allocation based on feelings may be recipe for selling low and buying high.
For the record, I am still fully invested in equities and am still able to find individual stocks which seem substantially undervalued relative to my estimation of fair value.