(Image: Chris & Jennie on top of Half Dome)
Investing Lessons from the Trail
Over the long Fourth of July weekend, I hiked Half Dome in Yosemite with my wife, Jennie, and a few friends. The 17-mile roundtrip hike was one of the most beautiful and grueling hikes I have ever completed. We climbed nearly 4,800 feet above the Yosemite Valley, and the hike took about 11 hours to complete.
After climbing eight miles to the top, one is faced with then ascending the cables. Which, if you haven’t seen pictures, is a slippery granite rock situated at a 45 degree angle. You essentially say a prayer and pull yourself up with sheer arm strength. To say the 400 feet final climb is nerve racking is an understatement. As the anxiety of climbing the cables faded and we headed back down the mountain, I couldn’t help but think about the parallels between investing and preparing for/completing a strenuous hike like Half Dome.
What stood out to me as the strongest similarity between the two was the importance of planning for a range of different environments one may encounter on the journey. Our game plan was to begin our hike sometime between 5:00 am – 5:30 am. This is before sunrise, so we needed to pack headlights and warm layers. The first part of the hike is called the Mist Trail, which climbs alongside Vernal Falls. It is an area where hikers have reported getting soaked by the falls while climbing. We each brought water shoes, a change of socks, and a change of shorts. After all, we didn’t want to be soaking wet two-miles into a 16-mile hike. In addition, the weather that day was supposed to be around 90 degrees. So we also needed light gear, plenty of water, and sunscreen. We had to prepare for different hiking conditions without knowing if or when we would need to break out the gear along the way.
Just as we needed to plan and prepare for the different hiking environments we may experience along the trail, investors should build a portfolio taking into consideration the different market environments they may face. We don’t know when the next recession or abrupt stock market decline will come. We just know they will come. What about inflation or deflation? Or rising or falling interest rates? How is your investment portfolio positioned for those environments?
In both instances, we prepare for the journey without knowing exactly what elements and obstacles we are going to face. We don’t know if the weather is going to turn suddenly or if the hike up the Mist Falls requires a complete change of clothes. Similarly, investors don’t know, with any advanced warning, when stock prices take a sharp turn lower. Just like on your hike, where you can’t go back to the car and grab the appropriate gear, with investing you cannot decide after you can’t decide after the fact that your portfolio should be positioned differently to better weather current events.
You must have all the appropriate gear with you when you start the hike, and with investing you must maintain proper portfolio diversification from the start. That may mean bringing items with you that you don’t need. For example, we didn’t need our headlights. The sun was up enough for us to use the natural sunlight. We also didn’t need the spare water shoes or an extra pair of shorts. The Mist Falls trail was wet but not enough to warrant a complete outfit change. At the time, I remember thinking to myself, “Man, what a waste it was to bring the headlight, the water shoes, and shorts.” After all, when you are hiking 17-miles, you don’t want to be carrying extra items in your backpack. It weighs you down and takes up valuable real estate in the backpack.
On the other hand, had we started the hike in the dark without headlights or end up drenched after hiking up the Mist Falls leaving our clothes, socks, and shoes wet for the remainder of the hike, it would have made for a miserable experience.
The same can be true with an investment portfolio. A prudent investment strategy is to construct a portfolio that performs well in all conditions. However, that may mean holding investments in the portfolio that “weigh your returns down” at times. Bonds are one example of this. Over the past ten years, stocks have averaged 12-14% per year. Bonds, on the other hand, over that same time period, have averaged only 4% per year. Nevertheless, when the “clouds” roll in and stock prices fall in value, it is those lowly bonds that act as a portfolio stabilizer, dampening the volatility of stocks. Just like Mother Nature, the markets are unpredictable. To keep your portfolio on track, you need to prepare for both sunny and stormy conditions.
Much like a hike, a portfolio has to be planned. However, unlike my one-day hike, investment portfolios are not measured in days but decades. Therefore, because it is sunny and bright one day doesn’t mean the clouds can’t roll in and turn stormy the next. Whether it is putting together a hiking trip or an investment portfolio, create a plan that gives you the best chances to do well in different environments.