While hiking in Switzerland years ago, Launa and I were surprised to see someone jump from a nearby cliff wearing what we later learned was called a wing-suit. Just before hitting the ground, the jumper pulled a small parachute and landed on his feet to great excitement from a nearby crowd. This was followed by several more performing the same feat, each appearing to be in a contest to see who could get the closest to the ground before pulling the chute. As we observed this amazing, and in some ways disturbing activity, I wondered how long it would take before a jump would end in tragedy. I viewed the jumper’s behavior as bordering on crazy, but they seemed to be thoroughly enjoying it. I wondered how they could feel comfortable doing something that was clearly very dangerous. I was certain that there had been a long process of going from relatively safe skydiving to what we were witnessing that day.
There is human phenomenon known as “Risk Creep” which is defined as having an increasing tolerance for risk when prior risky behavior does not result in a bad outcome. As with these base jumpers, each step of increased risk that does not result in harm becomes more comfortable. The person then takes another more risky step until one day the risk is too great and something bad happens. Risk creep has contributed to the deaths of many wing-suit jumpers.
Managing risk is one of the key principles of investing. Most investors know that to manage risk you attempt to create a portfolio with an acceptable balance between various types of investments. As the portfolio grows, rebalancing becomes a key element to help the risk level remain reasonable. When markets are going up significantly, it is not uncommon for investors to overlook the need to keep the portfolio in check because they are enjoying watching it grow. As the portfolio grows, inevitably some positions outperform others, putting the investments out of balance and possibly increasing downside risk. The happy investor in an up market may not realize that they are slowly becoming comfortable with increased levels of risk – risk creep!
This has been a good year for the stock markets. The conclusion of the election cycle this week brought some additional significant gains. This is not uncommon in election years, no matter who wins, as the market is often just happy to have the uncertainty of it all in the rearview mirror. If the next few months continue to bring higher markets, investors will enjoy them, but I must give a caution. Be especially mindful of the potential for risk creep during times like these. You don’t want to wake up one day with the market falling and realize your financial parachute has turned into a wing-suit.
Dan Wyson, CFP® is a long running national financial columnist, author of several books and CEO/Founder of Wyson Financial/Wealth Management 375 E. Riverside Dr. St. George, UT 84790 – 435-986-9525 Securities and Advisory services offered through Commonwealth Financial Network, member FINRA/SIPC, a registered investment advisor.
