The risk of seeing the solar eclipse was totally worth it! I'm not talking about the risk of eye damage; with the right equipment and knowledge, that risk can be reduced to zero. Similarly, with modern music streaming services, you could hopefully avoid a Total Eclipse of the Heart.
The risk my family took last month was the >30% chance that it would be cloudy in Tennessee when the moon's shadow passed over us. It would still get dark, but we wouldn't be able to see the crescent shadows, the iconic ring, or the solar flares. We planned for years, spent hard earned money and valuable time, and sweltered in Nashville. We knew the clouds were a risk all along. Indeed, we chose the Nashville area over other cities in part because of its relative lower chance of cloud cover in August. That decision had to be made months in advance, though. This was also a family reunion. Hotel rooms had to be reserved; kids activities for the weekend had to be researched; plane tickets had to be bought. We were locked in by September 2016!
It would have been really disappointing if it had been cloudy that day (thankfully, it wasn't). I had been privileged enough as a kid to see the 1991 total eclipse with my parents, so I knew what it was like. My wife, on the other hand, remembers the annular solar eclipse of 1994, but that wasn't a total eclipse. So, going into this planning process, she was skeptical that this was worth the trouble. I got the same impression from others in my family who hadn't been with us in 1991. It felt like we were gearing up for an "I told you so" moment either way. If it was cloudy, we would all be disappointed, and those who didn't understand how impressive it would have been would say, "the risk wasn't worth it!" However, if it was a clear day, I was confident that everyone would be in awe of the event (and they were).
Here's the crux of the issue, though: if we hadn't taken the risk, we were guaranteed to fail. The only way to see the total eclipse was to be in the path of totality and get lucky with the weather. If you didn't have the privilege of already living in the path, then you had to spend resources to get yourself there. If your goal was to see this extremely rare event, you had put luck, risk, and planning together to do so.
Now you might ask: aside from being a science nerd, why am I writing about this? As a portfolio manager, I see interacting with the capital markets as a very similar prospect. There are a fortunate few that could, if they wanted, avoid all market risk and live on a budget of government insured interest payments in their savings accounts for the rest of their lives. These people can fly in a Concorde above the clouds and watch the eclipse for 74 minutes. The rest of us, though, must do solid planning, accept some risk, and hope to avoid catastrophic bad luck, or we will surely fail to achieve our financial goals.
Certainly, the Great Recession was painful, and if you are over invested in stocks shortly before your planned retirement, there is a lesson to be learned there. Unfortunately, it appears that the experience of the losses suffered during that time, even if it was vicarious, has made many younger people now avoid risk in their investment portfolios. While avoiding market risk will dodge the possibility of losing money in the next downturn, it also greatly increases the risk of failing to have enough money to achieve goals that are many years away. If you don't accept the risk of the market, you instead accept almost certain failure.
The good news is that there are a number of tools available, including our simple online calculator, that help drive home the idea that consistent saving and investing can turn into much more than the original sum over time. The more customized and advanced planning brought by a fiduciary financial advisor can help articulate the need to accept risk in your investment life even better. Even if you already understand the need to accept the risk, having the right tools makes the process of managing your investments much easier and rewarding. No one wants to arrive on the bright hillside in Tennessee only to realize that their sunglasses were left at home.
Andrew Stewart, CFA is a Senior Portfolio Manager at Exchange Capital Management. The opinions expressed in this article are his own.
