April 16, 2024

Dear Friends:

The Power of Making Good Risk Assessments

The popular Netflix series “Stranger Things” is set in a small Indiana town in the 80s and has been widely acclaimed for recreating the social environment and nostalgia of the times.  Many of you over 40 may relate to the experience of growing up as kids in the 80s and early 90s.  A typical afternoon might consist of riding our bikes around the neighborhood (without helmets of course), building ramps to jump ditches, wading through (likely polluted) creeks to catch crawdads, shooting pellet guns, and then quenching our thirst with water straight out of the garden hose!  The general rule of thumb is that we better be home by dark or dinner, whichever came first. Contrast that with today with helicopter parenting and GPS-enabled devices allowing us to track our kids whereabouts on Life360 or FindMyiPhone.

What has changed?  One of the changes is in our cultural risk assessments.  In other words, our collective perception of risk in those activities has changed and caused our culture to move from making risk assessments to avoiding risks altogether, or at least trying to eliminate them by all reasonable means.

Most people manage risk daily, knowingly or unknowingly, to maintain their health and safety, business interests, viability, and lifestyle. Simple things like crossing the road, driving to work, getting on a plane, lifestyle choices and more see us using risk management techniques to ensure our safety and well-being.

The Pain of Loss vs. The Joy of Gain

You may have seen the recent news that Daniel Kahneman passed away at the age of 90. In case his name is not familiar, Kahneman is one of the most well-known pioneers and architects of Behavioral Economics and wrote the NYT bestseller, Thinking Fast and Slow. Kahneman helped introduce one of the key insights of Behavioral Economics – the idea that losses hurt more than gains feel good – also known as loss aversion.

We believe it is helpful to appreciate how this powerful concept can impact our decision making, especially in investing. As we look at 2024, markets have enjoyed a very strong start to the year with US large company stocks up double digits in the first quarter, followed by US small and international stocks up mid-single digits. All on the heels of strong 2023 returns. While we have enjoyed these strong tailwinds, there will likely be more difficult times in the future with increased volatility that test our ability to stay disciplined.

However, this is why we build a plan with a rules-based approach to remind us of our goals and priorities when facing uncertain times and limited visibility. This is when the pain of loss or loss aversion can most negatively impact our behavior and ability to reach our long-term goals. While we are excited about our recent performance, we believe it’s also prudent to remind ourselves that a successful financial plan that consistently pays off requires diligence, hard work, and persistent investing in bad times and good. Managing the tradeoffs between risk and reward is important and we are glad to partner with you on a financial plan that allows you to go out and enjoy life!  Just remember if you ride your bike to always wear a helmet!

As always, we are extremely grateful for each of you and thank you for your partnership!

Regards,

Mitch Anderson                                              Destin Tompkins