Of Bumps in the Air and Preparing for Bears:

I have been advising clients on what to do with their assets for a long time, but I’ve been investing, and flying planes, for even longer.  This week, as my plane was gliding along at 45,000 feet on a crystal clear day, we suddenly hit an unexpected pocket of turbulence – known creatively as an “air pocket.”  It has happened before, and will happen again – it is in fact expected, but no amount of preparation can stop your heart from nearly popping out of your chest when you fly through one.  Air pockets are essentially turbulence on steroids, they are those unforeseen events that leave you gasping for, well. . . air.

After we came out of the air pocket, it reminded me that flying and investing have much in common.  Sudden drops in the stock market are bone chilling, yet just as the plane is built to handle sudden changes in altitude so should portfolios be built to weather any unexpected turbulence in the markets.   We can’t eliminate the natural instinct of fear and panic – but we can certainly prepare for it and recognize the feeling for what it is – fleeting. 

In the market, people are so focused on the upside and how to get an extra return they forget to look out on the horizon and answer, “what if?”  What if an air pocket sends me for a ride?  Is my portfolio prepared, and more importantly am I psychologically ready? 

As air pockets in the market expand and volatility increases, the probability of a significant drop in the market rises substantially.  The 1000 point intraday drop of the Dow on May 6^th, the “flash crash,” was a game changer.  It proved that large selloffs can and will occur. What is worse is that headlines such as “Trading Glitch Caused Market Drop” and “Congress Seeking Answers to Drop” were meant to pacify rattled investors without a disciplined risk management process. 

While in less volatile times air pockets in the market are very random, the ones we are experiencing lately have been planted akin to landmines - driven by sovereign stimulus and the false assumption that piling debt upon debt upon debt is the answer.  There seems to be a governmental air pocket between reality and hope.  Europe has given us a warning shot across the bow – has it registered? 

The US, the veteran pilot of the world’s reserve currency, must realize that someone needs to take control of this plane lest we transition from air pockets to a flat out nose dive which cannot be recovered.  With the US deficit as a percentage of GDP in the same area as Greece, we can’t keep flying through storms and expect to emerge completely unscathed.  The world is currently the victim of a grand Ponzi-scheme, with central banks playing the role of Madoff – borrowing from one to pay off another.  Currently, the US represents the best of the worst.  As the Dutch scholar Erasmus said, “In the land of the blind, the one-eyed man is king.”          

Over my 27 year career I have been accused of being both extreme bear and extreme bull, but the fact is I am a realist.  As a pilot and an investor I remain alert and cognizant of risks on the horizon – I prepare rigorously for the worst, and hope for the best – in my opinion, it’s the only way.  Managing risk with a disciplined investment process is just as critical as systematically preparing for every flight with a checklist.  On a daily basis I choose whether or not to advance or protect, with a fundamental focus on protecting clients’ wealth.  Sun-Tzu, the legendary military strategist from the ancient Far East puts it simply: “One who knows when he can fight, and when he cannot fight, will be victorious.”  Advance, and Protect.  Prepare for the unexpected – sounds very basic, but most investors are naturally reactive, not proactive.  It’s just how we’re wired. 

The ongoing risk management questions that you as an investor should be asking ask are, “What is my risk budget?” and “How do my assets react to air pockets?”  If you wonder what the answer to the first question is, you are not ready for turbulence.  Once you realize it is getting choppy, it’s too late - you will grasp for safety constraints to find none. 

If your response to the second question is, “I hope well,” you need to develop a protection plan!  Hope is not an investment strategy.  When we see air pockets on the horizon we proactively protect clients’ wealth.  This Advance and Protect mentality is a 180 degree shift from the norm of buy, hold, and hope.  If your advisor only says sorry for his inaction and for not having a disciplined investment process, now might be the time to change pilots.

Ron Carson is CEO and Founder of Carson Wealth Management Group in Omaha, Nebraska, and has worked extensively in the field of financial management since 1983.  He is a registered principal with, and securities are offered through, LPL Financial, Member FINRA/SIPC.