Lauren Juliff is a travel writer and has spent much of the last nine years chasing adventure around the world and writing about those adventures on her blog, neverendingfootsteps.com. She has been obsessed with the idea of exploration since she was a little girl. As a child she constantly daydreamed about visiting exotic foreign lands and learning about other cultures. When she reached adulthood, she made the bold decision to pursue her dream life as a career. The only problem was that she was deathly afraid of flying. This fear can be quite a career challenge for a travel writer.
Gaining experience with flying did not diminish her fear as the more she flew the more anxious she became. In the week leading up to a flight, she would have graphic nightmares of being in a plane crash, which would then cause her to believe that it was a premonition and that she shouldn’t get on a plane. During the flight she would replay her nightmares and anxiously wait for the plane to plummet out of the sky. What began as slight jitters during the first few months of her travels turned into full-blown panic attacks by the end of the first year.
Lauren had earned a master’s degree in physics; she understood exactly how planes take off, fly, and stay airborne safely in all kinds of weather. But this technical knowledge did not help her overcome her paralyzing anxiety. She finally overcame her fear when she visited an airport bookstore and purchased a copy of Cockpit Confidential, by Patrick Smith. Smith is a pilot and the writer of the “Ask the Pilot” column for Salon. Over his long career as an airline pilot, Smith had seen it all, and in his book he calmly describes everything that can go awry during a flight and in a cockpit, and discusses why none of these seeming perils are a big deal or a cause for worry.
Lauren noted on her blog, “I thought I was reasonably well-educated about flying, given that I have a master’s degree in physics and all that jazz. But it turns out, understanding how a plane flies and stays up in the air wasn’t enough to keep me calm and rational. Instead, I found that having a pilot explain every single thing that happens when you fly and how none of it is actually scary or dangerous was exactly what I needed.”
The answer to Lauren’s problem was not for her to walk, drive, or travel by horseback for the rest of her life. The solution to her problem was to fully understand the actual risks of commercial airline flight, and to become comfortable assuming those minimal and manageable risks.
Identifying a fear such as Lauren’s is easy. Overcoming it is the hard part. With all fears, we must first seek to understand and then to educate. Maybe the person does not understand how a plane can fly. Maybe the person knows someone who died in a plane crash. Maybe he does not understand the extremely safe record of commercial flight. Maybe the person does not fully comprehend the risk and does not know that he has a much greater chance of being injured on a drive to a store in his neighborhood than he ever does getting onto a plane.
Flying, statistically, is one of the safest ways to travel. The Discovery Channel notes that there is only a 1 in 11,000,000 chance that a person will die in an airplane accident each year, while there’s a 1 in 5,000 chance of death in a car accident. In the United States alone there are more than 30,000 deaths a year caused by auto accidents, while there were only thirteen deaths globally in 2017 in two fatal airline crashes worldwide, and both accidents occurred on regional turboprop aircraft. Shying away from perceived risks is not the answer. Understanding why we are fearful, coming to terms with what this fear is costing us, and accepting the risks in order to enjoy the benefits is a much better solution.
The irrational fear of unlikely or temporary risks is also very common in the financial market and investing world. Far too often, a new client will be asked about his risk tolerance level prior to beginning to invest or while creating a plan for long-term wealth management. A well-meaning financial advisor or technology-based advisor platform may ask the new client how comfortable he is with assuming or living with risk. The investor may be asked questions such as, “How will you react if the stock market loses 20 percent in a week?” or “If the economy enters a recession and your account balance drops by 25 percent, how will that make you feel?”
These questions are typically used to assess a client’s history with investments or their past actions while their money was under stress from a declining market. However, the answers to these types of questions should never be used to assist in the creation of a long-term wealth-investment plan or for making asset-allocation decisions.
How a person feels about taking risks, or how their own personal psychological makeup causes them to perceive risk in their world should not be a factor in how a long-term wealth-management plan is constructed or managed. Only by properly understanding a client’s view of risk and educating an investor on the true nature of the long-term risks of his investment choices can we guide a skittish or worried investor to the proper wealth management path.
Fear is a thief. It steals peace of mind. It steals money in the form of lost future growth of wealth. And it steals happiness as the fearful investor constantly worries about things that seem scary but that in fact are not. The human mind is two million years old, but it is not designed to ensure that you are happy. It is not designed to make you feel comfortable or content. It is designed to help ensure your survival. And it does this by using fear, by forcing you to shy away from both real threats and perceived risks.
The easiest path for the mind to take when faced with a potential threat or risk is to flee or back away. This is how humans have survived and thrived over time. This fear instinct may have served us well when confronted with a lion on a savannah, or when venturing too close to the edge of a cliff, but the fear instinct does not serve us well in the modern world of investing and wealth management. Fear is a primitive instinct that can be a hindrance to success in our modern, complicated world.
If a twenty-two-year-old new investor has a very low tolerance for risk because his parents were always very worried and risk averse, the proper path is not to advise him to invest in ten-year U.S. Treasury bonds for the next forty years, so that he is able to sleep well at night. Although the risk assumed with government-guaranteed bonds will certainly be lower than if he invested in the stock market, the bond investment will grow his wealth at a far slower rate than a stock market investment would, which will lead to a strong chance that he will not be able to meet his long-term investment goals.
The proper path is to first discuss why he is so risk averse, and then educate him on the long-term nature of risk. The client and advisor should discuss why he needs to accept an increased but prudent level of risk if he wants his capital to grow at an acceptable rate over time. And how, as a long-term investor with a very long timeframe, he can ride out the inevitable ups and downs of the economy and stock market and still compound wealth over time. But that will only happen if he lets go of short-term worries and negative thinking. Similar to airline travel, an investor must become knowledgeable about, and comfortable with, accepting a prudent level or risk if he wants to end up at his financial goal destination.
The S&P 500 has gained an average of 9.5 percent a year over the past seventy-five years. That is a very attractive rate of return, but there is a price of admission for those gains. That price is uncertainty. The gain in the S&P 500 for any one year is rarely close to 9.5 percent. It may be 20 percent in one year, and then one percent the next. That is how the stock market works. An investor must muddle through and stay the course in the bad years, so they can enjoy the benefits of strong gains in the good years. Much like airplane travel, the flight may be bumpy at times, but you will get to where you want to go.
The stock market could decline 25 percent during the next year. That large decline could certainly be emotionally painful if an investor pays attention to it, but his financial future can only be permanently derailed if he flees his investing plan because he cannot bear the short-term pain. What should you do if the market declines sharply over a short period of time? Very simply, don’t do anything. Continue to make new contributions to your investment account according to your long-term plan. Do not forgo the potential to earn long-term gains to avoid short-term pain.
Difficult economic conditions and downturns in the stock market are sure to happen during your investing lifetime. For 240 years, the United States economy has experienced long periods of strong economic growth and had short periods of slow or negative economic growth temporarily interrupting these long advances. We should fully expect these economic and market ups and downs to continue. The stock market was recently at an all-time high. That indicates that for every recession, world war, depression, political scandal, civil war, and financial crisis, we have made it through, survived, and gone on to new market highs. That’s happened 100 percent of the time. With a record like that, the real risk for the long-term growth of your wealth is to be out of the market, not in it.
