I once had the opportunity to hear a speech by Neal Beidleman, one of the guides on the ill-fated Mt. Everest expedition in 1996, which resulted in the book “Into Thin Air.” He did an excellent job of analyzing why the expedition failed and resulted in so many lives were lost.
Because of low oxygen at high elevation, the team’s mental reasoning was similar to that of a third grade child. It was critical that the team have a plan that was well understood and followed. When two joint leaders failed to make the teams adhere to one critical goal, many people died.
Market crises and steep declines are the “Thin Air” times for investors. Investors that have planned well and stick to their plan will survive. Those that break from a rational plan, developed while not under pressure that has proven effective in past crises, risk disaster.
One tool to battle market declines is to continuously rebalance the portfolio so you retain the same percentile equity position at the bottom of the decline as when it started. This has maximized recovery in the past. It’s gut-wrenching to hold to this in a declining market because the “Thin Air” of fear makes our “third grader” thinking believe the market is never going to go back up again.
During the Everest expedition, one woman kept her oxygen mask on too long at high altitude, even after her oxygen tank ran out. When she was found, the mask was frozen to her face and she was suffocating. When her fellow climbers tried to pull the mask off, she resisted because she was afraid to go without the oxygen that wasn’t there. She later died because of her weakened state.
If we break from the process and run to less volatile investments that don’t have the inflation-fighting return one needs for long-term investing, we run the same risk as the lady with the oxygen mask. We feel safe for a while and then suffocate ourselves financially when the safe investments run out too early in our lifetimes, and we dare not take the “mask” off because of fear.
What does this all mean for investors today? Remain patient and stick with a prudent plan. In the long run – despite the ups and downs of a volatile market, you’ll find your return on your investments will be positive.
