REDUCING YOUR RISK TO CURRENT EVENTS

In our office investment committee meeting, we made the decision a couple weeks back to make a few changes in many of our client accounts in response to the Corona Virus scare. As a result, we had a few clients call for more clarification on the changes.
 
It would come as no surprise to people who know me that I begin these discussions with a reference to flying. One of the first challenges a prospective pilot faces is the realization that flying is much different than driving a car. Automobiles turn left and right. Airplanes turn left and right, but they also pitch up and down and roll. Controlling a plane in three dimensions can lead to frustration until you learn an important principle. It is that when the plane is off course, the key is to make very small adjustments to correct it. You then wait to see how the plane responds before making additional tiny adjustments as needed. A good pilot holds the controls lightly in his fingertips and makes changes that are barely noticeable to his passengers.
 
Modern airplanes are largely flown by autopilots. Before I start my engine, I load a flight plan into the plane’s computer which includes the departure and destination airports, and all the waypoints in between. Once airborne I can turn on the autopilot and then monitor the trip while the plane does the flying. If you pay close attention you can see the autopilot at work as the airplanes’ yoke, and the trim wheels move constantly in tiny increments.
 
In an ironic reality of flight, airplanes spend most of their time flying off course. The wind, turbulence, and imperfections in the airplanes’ structure are continually causing it to drift. In frequent but very small adjustments, the pilot, or autopilot brings the plane back on course.
 
It is also a reality that even though investors may have a long-term destination in sight, every day the winds of politics, economics, natural disasters and even viruses are constantly causing their portfolio to drift off course. The temptation is to overreact, which in a plane just makes the problem worse, as well as with a portfolio. The wiser approach is to make regular but small adjustments, and then wait and see how the portfolio reacts. As additional winds blow, apply additional small changes.
 
With this in mind, I view the coronavirus, at this stage in its lifecycle as a higher risk to certain investments and certain areas of the world. From a risk management point of view, it seems appropriate to make some small adjustments to avoid these risks for a time. There are plenty of other opportunities elsewhere, so we decided to make a few small changes and then watch to see if more are needed. Guiding a portfolio is like flying a plane. Avoid sudden or large movements but apply regular small corrections as needed to stay on course.