3 Lessons in Risk Tolerance

On a recent family outing to Nashoba Valley Snow Tubing Park, I was presented with an unexpected opportunity to deepen my understanding of my own risk tolerance. I also came away with some new insights into just what a slippery concept “risk tolerance” is — whether in the context of sliding down a steep slope on a tube or designing a portfolio for a client. Here’s what went down and why it matters to your money.

First, some background:

This was the 2nd Annual Family Snow Tubing Day, because everyone had so much fun last year. I, for one, had some specific ideas about how to make this year’s trip even better. Last year’s warm temperatures had made it enjoyable to stand around chatting while waiting in the lift line. But they also meant that to go anywhere near fast enough on the slushy surface, you had to link in a train of 6 tubers. Fun in its own way, yes, but nowhere near the thrill we got on the last run, after the sun went down, the track froze up, and even a 3-person train was able to get up a good head of steam.

So my bright idea for this year’s outing was to a) wait until a cold day, and b) go at night. Well, it seems I failed to consider what happens when snow that’s been rained on meets sub-freezing temperatures in the dark. You got it: every tubing lane was coated with a thick slab of boiler-plate ice. The staff warned us it was “pretty fast” and we noticed there was more screaming than the prior visit. Still, I was unfazed.

Suffice it to say, that attitude shifted dramatically during the first bloodcurdling run after the tube spun 180 degrees right out of the gate and proceeded to accelerate to what seemed like at least 50 miles an hour. Suddenly, I was hoping for a heat wave, inquiring as to the gentlest lane, watching for techniques for slowing down and staying straight, and opting for the longest lift line.

My Epiphany and the Lessons it Spawned:

In an admission that I freely concede brings to mind the phrase “get a life”, there was no way I could miss the investing analogy: I was the investor, the tube was a “too-aggressive” portfolio whose risk was hidden during less threatening conditions, and the slippery slope was the skidding stock market of late 2008. What follows are my 3 risk tolerance insights from the 2nd Annual Family Snow Tubing Day…

1. Keep back from the start of the run until it’s time to go. Only once did I see anyone recover gracefully (i.e. get back in the tube and have a successful run) after inadvertently beginning a run separate from his tube. He was young, agile, persistent, fearless… and lucky, i.e. pretty much the same demographic best positioned to recover gracefully from a stock market crash.

To avoid the investing equivalent of the scrambling this kid had to do, make sure you have a sufficient cash cushion to cover emergencies and near term expenses BEFORE jumping into the market.

2. Expect — and plan for — the unexpected, and at least try to visualize the worst case scenario. This is where I blew it at Nashoba, having extrapolated from my single previous experience that I wanted and could handle conditions that were, in retrospect, several orders of magnitude more hair-raising. Those icy conditions, which scared the ski pants off of me, were met with nothing but delight by my preteen niece and nephew and the more thrill-seeking adults in the group, which is to say all of them. Some even sought out Lane #2 whose unique feature was The Crag, a large block of rock-hard ice protruding into the lane at just the point where a tuber is most likely to hit it and incur maximum damage.

A fate similar to my snow tubing lesson awaits investors who base portfolio decisions on experience that includes only bull markets, periods of modest volatility, and/or lucky timing. In other words, the Lane #2 of the investing world might be a perfectly good choice for those with the knowledge, risk tolerance and capacity, and resources to emerge unscathed from its potential hazards.

The rest will get extremely jittery and will almost certainly be tempted to do something not in their best interests. Depending on the degree of risk aversion, chances are they’d be better off sticking with the financial version of Lanes #3 – 8, sipping hot cocoa in the lodge, picking a warmer day, or taking up snowshoeing. Translation: While a more conservative portfolio can’t and won’t deliver the potential thrills of a more aggressive one, neither will it deliver the heart-stopping spills. Depending on who you are, that can be a much richer experience.

3. Once committed, stay onboard; don’t jump ship, and carefully think through before making mid-course corrections. Trying to dig in your heels while going forward could result in more damage than just letting the tube and the slope do what they will. Best case, because the coefficient of friction of one’s backside is much greater than that of the tube, you could end up walking/slip-sliding the entire long, flat (but still icy) section normally intended to slow the tube before it hits the last-ditch rubber stoppers at the end of the run.

The Takeaway

This is essentially snow tubing’s version of a panicked “sell everything and never invest in the market again” response to a downturn like 2008’s. The initial wild ride is so arresting that it evokes an overreaction too far in the other direction, resulting in very low prospects for return on investment forever after. That can make reaching your goals — especially the Granddaddy of ’em all, retirement — really, really difficult. Better: Invest at no more* than the level of aggressiveness that fits you and your situation, and stay the course.

*Yes, there are lesser known, but also insidious, risks associated with investing too conservatively, namely loss of purchasing power, but that’s a topic for another day. In the meantime, if you like snow-themed risk tolerance articles, check out this oldie-but-still-goodie: Happy Trails: A Skier’s-Eye View of Volatile Markets.)

About the author

Sherrill St. Germain, CFP®

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