When bad stuff happens in the investment world, be a Stock Market Martian.
Mark Watney is left for dead and abandoned on the surface of Mars. He figures out how to survive for years on a planet where nothing grows and and the atmosphere is toxic to humans. Needless to say, he is forced to improvise or, as he says, “science the heck” out of his problems.
While Watney’s story takes the context to a much higher level, even on Earth life is full of stressful unknowns. There are two ways to deal with them: reaction or readiness. The Martian explores and contrasts both approaches in extreme conditions. Really bad stuff happens in space. While Watney does flirt with despair and other non-productive, fear-based reactions – he is human after all – he survives because he takes the readiness approach drilled into him through years of training.
We aren’t all cut out to be astronauts. They’re a rare breed.
Astronauts accept their own mortality and respect the brutality of space while still being attracted to its beauty and mystery. They understand the risks of space and are mentally prepared for a likely-terrifying out-of-sample situation to arise. They also have the education, skill set and resourcefulness to manage the impossible when it happens.
Anyone else (including me) would have gone the reactive route and been dead long before the rations even ran out. Instead, Mark Watney was ready for anything, even if he wasn’t thrilled about his predicament.
Astro Investor – The Stock Market Martian
Bad stuff happens in the stock market, too. Corrections are a regular feature but even so, most investors aren’t ready for them. They are surprised and with rare exception wind up taking the reaction route. This is partly because of how humans are wired – we are emotional and reactive creatures after all – but it’s also because readiness requires an appreciation for the ability of a market downturn to inflict serious losses on a portfolio. That’s a lesson not easily learned by investors and rarely taught by the media or even most financial advisers.
Just as Astronauts are a rare combination of academic chops and thrill-seeking attitudes, there are very few people who possess the personal attributes to be a successful investor. Naturally, most people are emotionally invested in their portfolio and prefer not to think about undesirable market outcomes. It’s way more fun to contemplate the upside, especially when the last few years are full of positive results to reflect upon.
Then, when the inevitable correction does happen, everyone freaks out.
It doesn’t help that investment advisers and the financial media, in an attempt to make the market more palatable, downplay the downside built into just about every portfolio. They hype up the power of diversification, their models and modern portfolio theory. In 7 out of 8 years, things work out OK and everybody is relatively happy.
It’s that 1 in 8 years that’s a problem.
For a while you can get away with going into space in a tin can with a space suit and a few days of extra provisions. Eventually, however, the risks will catch up to you and you’ll probably wind up dead. Likewise, you can invest your life savings in a well diversified portfolio but eventually that wealth will get caught in a downdraft. At that point it would be helpful to know the true limits of your resources.
If your portfolio would lose 25% or more when the next major correction happens (and that is a “when,” not an “if”), when would you like to know that? After the fact (“Oops, we didn’t bring an extra space suit in case this one stops working!”) or before the damage is done?
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You owe it to your future self to understand the possibilities and to respect all reasonably likely outcomes. Then, when bad stuff DOES happen in the stock market, you won’t be surprised when you open your account statement.