By: W. Kirk Taylor, CFP®
Yesterday, Americans celebrated Columbus Day, a national holiday in the United States that commemorates Christopher Columbus’s historic landing in the New World on October 12, 1492. As of 2021, and per proclamation by President Joe Biden, the holiday doubles as Indigenous Peoples’ Day to honor North America’s Indigenous peoples and the Tribal Nations living on the continent today.
While Columbus reached the new world safely, he didn’t exactly find the destination he had hoped to reach, an island just off the coast of Japan. Perhaps this is where the notion, that the journey is what matters and not the destination, might have come from.
Columbus, hailing from Genoa, Italy, meticulously planned his epic voyage, and this holiday serves as an occasion to celebrate Italian-American heritage while acknowledging the strategic thinking that underpinned his journey and the benefit of planning for the future.
In Columbus’s era, Europeans sought a new route to Asia for coveted silks and spices. As such, Columbus was compelled to develop a comprehensive plan to sail across vast waters, waters that we now know as the Atlantic Ocean.
Sailing can be a risky venture, especially if you are not prepared for the unexpected, and the same can be said for investing, whether you are investing in stocks, bonds, real estate or in a business enterprise.
In the end, thinking carefully about and planning for the goal you wish to achieve and the destination you wish to reach e.g., putting your children through college, retiring at an early age, traveling the world, or giving your time and resources generously to your cherished charitable cause(s), is critical to your success.
At the same time, investors must analyze the risks inherent in investing, as investing involves a range of factors, including market volatility, unexpected developments, and the potential for financial losses.
Investors who willingly embrace risk understand that the potential for profit arises from the calculated risks they take. This is analogous to Columbus’s profound risk of sailing into uncharted territory. In the end, his risk was rewarded with the discovery of new lands, people, and vast riches.
Columbus and his crew sailed for six long months before sighting land. That’s not a long time in today’s fast-paced world with the internet and smart phones but can you imagine being at sea for six months without seeing land!?!? It must have seemed like an eternity.
This is a gentle reminder that time is a critical asset in investing, if not the most important asset. It is time in the market that matters, not timing i.e., market timing.
Over long periods of time, a diversified portfolio of stocks and bonds tends to weather volatile storms brought about by an economy that expands and contracts and expands in the short run, but always seems to expand over the long run.
Managing the risk and volatility of financial markets is a skill, much like the skill that Christopher Columbus exhibited as he traversed volatile seas on his journey in search of vast riches. Asset allocation and diversification are key risk management strategies that can help mitigate systemic risk.
Asset allocation (your allocation to stocks versus bonds and other asset classes) depends on factors like your tolerance for risk, your age, and your need for current income. Diversification involves spreading risk across a variety of investments (conservative investments to ballast aggressive investments) to reduce the potential for major losses.
Just as Columbus had to evaluate his own risks and assets before embarking on his sea voyage, successful investors must thoroughly assess the factors at play in their financial journeys.
Although Columbus didn’t land where he intended, he did achieve success, even if it was accidental. Columbus Day serves as a reminder of the importance of strategic planning, assessing risk, evaluating your own skills, being prepared for the unexpected factors that may necessitate changes to your portfolio, and focusing on the long term.
Along the way though, investors should always be prepared for unexpected factors that may necessitate changes to their portfolios and always make a habit of rebalancing their portfolios on a regular basis. In sailing terms, you might think of rebalancing as tacking. When the wind shifts, it’s time to “come about” plot a different course toward smoother seas, on your way to the final destination. ■