By Financial Advisor Peter Egolf | January 11, 2021
For anyone unfamiliar with rallying, it is a two-person driving sport that features staged time-trials through a course of public and private roadways. The goal is to complete each stage and the entire course as quickly as possible without destroying your vehicle.
The terrain is harsh and variable, ranging from pavement, gravel, dirt, and snow. A team consists of a driver and a co-driver. The driver lives up to their name and drives the car. The co-driver reads aloud notes to the driver in real-time, allowing the driver to prepare within milli-seconds for the path ahead and remain on course through the otherwise unmarked terrain.
One can experience this sport at Team O’Neil Rally School in New Hampshire. The school teaches techniques for driving, but the principles apply to investing.
While almost anyone can get into a car and drive, not everyone can do it well. The same principles apply to investing. As long as you have money, you can invest, but not everyone, including the financial industry, can do it well.
There is one particular rallying technique that applies to everyday driving as well as investing. Imagine driving home from work, and in a split second, an unavoidable pothole is in the path ahead. What do you do?
The human inclination is to apply the brake to slow down the car and minimize the impact on the tires, rims, and suspension. Wrong.
As Team O’Neil teaches in detail, right at the point of reaching the pothole, you should hit the gas and speed up! Try this, and you will see that the potholes no longer have the injurious impacts they once did. The logic is that by accelerating, you lift the car’s front end, shifting weight to the rear. As a result, the front suspension unloads completely, allowing the suspension’s full travel and minimizing the pothole’s impact on you! Life-changing.
Now, in principle, this appears simple. You see a pothole, and you speed up. However, executing this technique is nearly impossible without a concerted effort to overpower your brain and muscle memory. Even with years of practice, there is the propensity to revert to your initial intuition. So how does this apply to investing?
“The Pothole Principle” applies to the long-term journey of investing. When the market dips (think of the giant pothole), the human intuition is to sell. When the market increases, the human instinct is to buy. The reality is that you should do the opposite: buy low by speeding up at the pothole and sell high. Even with this knowledge, how do you execute properly and overcome human nature?
At One Day In July, we act as your co-driver for your investments. We strive to keep you on-course by creating a purposeful investment plan and helping to ensure that you are correctly navigating the market at every step of the way. The markets’ future path is unknown, but with the right strategy, tools, and guidance, you can be prepared to reach your goals, which is the purpose of investing. The best investor is not the one who has the most expensive investment vehicle but rather knows how to navigate the course with the least preventable disruption.
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