Pucker Factor

Late last night, I arrived back in New Jersey after spending the last few days at the inaugural Wealth/Stack conference out in Scottsdale, AZ.

The conference was a great time, and I’m sure there will be plenty of awesome recap posts to read soon. I want to share a quick story from Tuesday morning.

Dan Egan of Betterment organized a group hike on the Cholla Trail of nearby Camelback Mountain. Our trek began just after dawn, and was a great workout to say the least.

Here’s our crew at the top:

Other friends and conference attendees did this hike before us, and warned everybody that it was no joke. I nodded upon hearing their warnings, but deep down figured it wouldn’t be a big deal.

Obviously, I’m here writing this post, so I did survive. However, I found my heart racing several times on both the ascent and descent. In hindsight, the hike came as-advertised, but my overconfidence created a mismatch between expectations and reality. I’m not sure exactly what I expected, but I was not mentally prepared for what I got. I even saw pictures and video from the hike beforehand, but it just didn’t register in my brain.

This experience reminded me of a conversation Barry Ritholtz had with William Bernstein on his Masters in Business podcast. Speaking about our inherent overconfidence when investing, Bernstein said:

“We throw a simulation into a spreadsheet and say, ‘Here, I’ve lost 30 or 40 percent of my money, but it only lasted for a brief period of time. I can ride that through.’ But there’s a big difference between doing that in real-time and doing that in a spreadsheet.

And the way I like to describe that is it’s kind of like the difference between crashing an airplane in a flight simulator and doing it for real. Your pucker factor, as pilots like to call it, changes.”

My “pucker factor” while hearing others describe the Cholla Trail was basically zero. My “pucker factor” when I realized I had to essentially rock climb my way up was a lot more.

All things considered, I would hike the trail again and don’t regret my decision to do so. My heart was racing a few times, and I had some doubts mentally, but I wasn’t injured and was able to finish strong. I take this as a sign that I found the sweet-spot of my risk tolerance for hiking.

My feelings about the hike reminded me of a good rule of thumb I’ve heard Michael Batnick use to describe investor risk tolerance:

“If the drop on Friday made you nervous about your portfolio to the point where you felt like pushing a button, you’re probably taking too much risk. If you felt calm and relaxed, chances are you could afford to take a little more of it. And if you experienced moderate discomfort without feeling the need to log on and check your balance, you’re doing it right.”

Life and investing are all about which risks we choose to take. We can only figure out what our true tolerance is through trial, error, and self-reflection. The sweet-spot is being nervous enough to feel alive, but calm enough to not completely lose our cool. It’s a never-ending balancing act.