Burger, Fries and a Plane Crash

Well-known risk consultant Peter Sandman wisely observed that, “The risks that scare people and the risks that kill people are generally entirely different.” Why is this? His conclusion is that it has to do with control and familiarity. It seems that we are much less afraid of things that are familiar and that we feel are in our control (even if they are, in fact, much more dangerous).

The truth of Sandman’s observation hit home for me one day as I was enjoying a juicy burger and freshly cut French fries at one of my favorite burger spots. A story about a plane disaster flashed across the television. My blood pressure rose a bit as I followed the developing story, but soon I turned my attention back to my meal. As scary as a plane crash is, as I drove home on a typically crowded Northern Virginia road, I realized that the risk of dying in a plane crash was far more remote than the risk of dying while driving home – or of the burger and fries eventually doing me in.

However, the burger is certainly not very scary (and it is tasty), and for most, driving is certainly far less scary than flying.  This makes perfect sense when you consider Sandman’s criteria of control and familiarity. When we drive, we are behind the wheel and in control, and we drive pretty much everyday, so it is familiar. Flying, on the other hand, is eminently less familiar. Tony Kornheiser probably spoke for many people when he wrote in a column: “I’m somewhat anxious about flying. I recently made a list of things that scare me most about flying, and I narrowed it down to three: takeoff, landing, and the part where we’re in the air. Other than that, I’m fine.”

After more than 25 years in the financial services industry, I have definitely observed that the things that scare people and the things that kill people (financially) are entirely different. When it comes to investing, the thing that scares people the most are the markets’ short-term ups and downs like we are currently experiencing. However scary these market fluctuations may be, having a well-constructed portfolio that is part of a well-designed financial plan can prevent those fluctuations from being deadly to someone’s financial life. What is deadly is people’s responses to these market fluctuations.

Without a good plan in place, you will be tempted to counter your fear by trying to regain the “feeling” of control by doing something. The most common “something” that I see people doing is to start selling the things that are scaring them – whatever investments are currently dropping in value.

The outcome of following this path is generally very predictable and deadly – it devastates long-term performance. The reason is simple – more often than not, you inadvertently but relentlessly jump into an endless cycle of selling low and buying high. You are selling what has recently dropped in price and buying it back later – after it has gone back up in value…and feels safe!

With a good financial plan in place, while the markets’ ups and downs may continue to scare you, you can have the confidence to stay the course and avoid potentially killing your financial future.