Investing Down the Mountain by Nate Eads, CFP®

March is the time of year that stirs images of the earth turning green, flowers blooming, and soon enjoying all that summer has to offer.  March also means spring break.  While I eagerly look forward to warmer days, spring break growing up in my family was about our annual trip to Colorado to go skiing!  Downhill skiing is one of the activities I enjoy most so I was thrilled to have the opportunity to introduce my five year old son to the sport this year.  While watching him “get his snow legs” I started seeing the similarities between the evolution of the skiing life and the investing life cycle.  Just as it is important to know your talents and limitations to get the most out of skiing, it is also important to understand how your approach to investing will develop and change throughout life in order to have a successful and enjoyable run.

To start, master the basics.  For skiers this means learning how to stop and turn.  While it is tempting to want to fly straight down the mountain the first time out, doing so can lead to dire consequences.  The same is true for investing.  The first skills investors need to understand are the impact of time and disciplined savings.  Establishing a disciplined savings strategy and realizing time is one of your biggest assets is imperative to long-term success.  For novice investors may be a desire to find the next hot stock in order to make some quick money, but taking this approach usually will lead to disappointment.   Going too fast in the beginning may result in a bad experience both on the hill and in the portfolio.

Once the basics are covered, it’s time to get off the bunny hill.  Going down longer, steeper runs and increasing speed make skiing much more enjoyable.  Learning how to turn and carve down the mountain is really what the sport is about.  Once the basics of investing are mastered, it’s time to move onto strategies such as diversification and rebalancing.  Utilizing a wider variety of investments and incorporating a disciplined rebalancing strategy will help booster the eventual appreciation of a well designed portfolio.

After the core skills have been mastered, the real fun begins.  In skiing this may come from learning to ski moguls, shred the steeps, or catch some air on jumps.  This level of skiing is usually done when we are at our physical prime and can handle most of what the mountain throws at us.  For the investor, it is also during our prime earning and savings years that incorporating more advanced techniques can add value.  Integrating alternative investments, incorporating tax planning, and utilizing more advanced strategies such as opportunistically rebalancing or momentum investing can all help bolster returns.

For a select few, going beyond “advanced” may seem to be an appropriate next step.  In skiing, this is often referred to as extreme skiing and involves going out of bounds (skiing outside of the designated ski resort area), jumping off large cliffs, or skiing down exceptionally steep and difficult terrain.  Extreme investors may tempted by the perceived glamour of hedge funds, options, and speculative investing.  As with skiing, extreme investing involves high risk high reward.   There is often a high probability of getting hurt while trying to capture the added adrenaline or extra return, as I can attest to seven knee surgeries later!  It is imperative that to be at such a level you understand what you’re getting into and are willing and able to absorb whatever the outcome may be.

Finally, there will come a time to take all the experience, knowledge, and skills learned and you’re your attention to the simple enjoyment of the run.  There no longer is a desire to take unnecessary risk or get that rush of adrenaline.  In skiing this is often going back to the groomed trails and cruising down the mountain.  Perhaps teaching and watching younger generations provides as much enjoyment as does the leisurely approach now being taken?  Investment strategies may change focus to replacing income due to retirement, minimizing exposure to risk, and making sure we are financially secure for decades to come.  In both situations there is an aspiration to avoid getting hurt, often resulting in taking a more conservative approach. 

Being cognizant of where you are and knowing your abilities is key to being successful both on and off the mountain.  Enjoy the run.