I'm a white knuckle flyer, not because I don't trust the airplanes, but because I don't trust the pilots. I think of them as unusually courageous, but a little too cavalier. That impression was formed at an early age when, as a young boy, I used to go with my dad to visit the crop-dusters who were helping him develop the first firefighting air-tankers. I remember hearing profanity-laced stories about flying so low that they cut swaths through the brush, or flying so close that there were propeller marks on their fuselages. For reasons I couldn't understand, they seemed to think it was quite funny to crash a plane and walk away from the wreckage.

Years later, an advertisement for The Right Stuff, a movie about the Mercury 7 project, described the original astronauts as having a "...macho seat-of-the-pants approach to the space program." I couldn't help thinking how appropriately those words also described the crop-dusters and their approach to the air-tanker program. So, even though the two groups flew entirely different aircrafts, they used a similar mental approach for handling the dangers they faced.

After listening to a 2013 PBS interview with astronaut Chris Hadfield, it appears that the current crop of astronauts have a less macho approach that stresses preparation over seat-of-the-pants improvisation. It came out in the interview that NASA puts astronauts through an exercise in which they focus on "what's the next thing that will kill me." To paraphrase Hadfield: It's counter-intuitive, you know, to visualize disaster, but by visualizing disaster, that's what keeps us alive. That's because we don't just live with it, we look at it, we dig into it, we think about it, and we get ready so when something happens that would normally panic us, we have a plan that we are comfortable with.

Similarly, Jason Zweig in Your Money and Your Brain says, "The best investors make a habit of putting procedures in place, in advance, that help inhibit the hot reactions of the emotional brain." And rebalancing is one of the best of those procedures. It works because it encourages good behavior in both good and bad markets. The idea is to first pick an appropriate balance between stocks and bonds and then to keep that balance constant by selling stocks when markets are rising and buying them when markets are falling. Its beauty is that it is a practical way of implementing Warren Buffett's adage "...to be fearful when others are greedy and to be greedy only when others are fearful."

Rebalancing is especially helpful in down markets when, as Zweig explains, fear acts "...like a branding iron that burns the memory of financial loss into your brain... [So] a market crash, which makes stocks cheaper, also makes investors less willing to buy them..." Unfortunately, it also makes them more willing to sell. That's why he says "...the average investor saw...nearly 10% less than he could have earned if he had just left his money completely alone." According to my unscientific numbers, that's also why the investor who rebalanced made 10% more than the investor who "just left his money alone."

Zweig says, "...rebalancing is the best way to lock yourself into buying low and selling high." And since rebalancing works best in fluctuating markets, Warren Buffett says to "Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it."

It took incredible courage for the air tanker pilots and the Mercury 7 astronauts to fly by the seat of their pants. I don't know many investors who have the nerve to invest in such a cavalier manner. That's why most investors should emulate the current crop of astronauts and have a plan. That way they don't have to be, as Hadfield put it, "...braver than other people... just... meticulously prepared." And that's how white knuckle investors can become investors with the right stuff to handle market fluctuations.

It was 1955 and a team of Forest Service civil servants was inspecting my dad’s new creation, the air tanker. This original squadron of seven airplanes consisted of one Stearman and six N3N open cockpit biplanes that were nothing more than a skeleton of metal tubing covered with canvas. Upon looking into one of the cockpits, the federal bureaucrats were shocked, and more than a little concerned, that there weren’t any gauges. Turning to Ray Varney, pilot of one of the deficient crafts, a bureaucrat blurted out, “It isn’t safe to fly this plane. It doesn’t have any instruments.” Varney replied, “What do you mean it doesn’t have any instruments, can’t you see the metal nut attached to the floor by a string?” The confused civil servant could see it but couldn’t figure out what it was for. Varney explained, “When you’re flying along and the nut hits you between the eyes, you know you are upside down and you need to turn over.”

Knowing up from down is easy when you're standing on the ground, but in an airplane even the most experienced pilot can become disoriented. This sensation, known as vertigo, is “a state of temporary spatial confusion resulting from misleading information sent to the brain by various sensory organs,” according to the Pilot Friend website. This misleading information is the result of centrifugal force that your body cannot distinguish from gravity. If you are in a situation where you cannot see the ground or establish visual references, your body may come to believe you are flying straight and level when, in reality, you are flying in downward circles. As your airspeed increases, you think you are in a level dive and pull back on the controls. This only increases the tightness of the turn, resulting in an aptly named "graveyard spiral."

The solution to vertigo is to use and trust your instruments. However, the website warns, “The most difficult adjustment that you must make as you acquire flying skill is a willingness to believe that, under certain conditions, your senses can be wrong.” Investors also must be aware that under certain financial conditions, they cannot trust their senses. As a matter of fact, the research would suggest that we all suffer from terminal investment vertigo and need instruments that will override our faulty senses. Rebalancing maybe the most important of these instruments.

Rebalancing is nothing more than selling securities that have risen in value and buying ones that have fallen. For example, assume your portfolio held only two securities, a stock mutual fund and a bond mutual fund. Assume also, that the target allocation was 60% stocks and 40% bonds. If the stocks had a bad year and dropped to 50% of the portfolio value, you would sell bonds and buy stocks to rebalance the portfolio back to the 60/40 target. However, rebalancing is simple to understand but difficult to do because your senses will always want to buy high and sell low, which is the opposite of what you should do. According to Gordon Murray in his book, The Investment Answer, rebalancing is the remedy for this financial disorientation. "[It] is the automatic [pilot] way to buy low and sell high, without your emotions getting in the way."

During the recent market crash and resurgence, investors who rebalanced have experienced a full recovery and then some. That is significantly better than the ones who didn't rebalance and enormously better than the ones who bailed out. Just as spatial disorientation occurs most often in bad weather when pilots cannot see the ground, so is investment disorientation at its worst during financial storms when investors lose sight of hope. It is precisely at those times when the world is upside down that both pilots and investors need a good smack between their eyes to remind them it is time to realign their airplanes or rebalance their portfolios.

heartbookbookmarkusercalendar-fullpie-chartdiamondleafbriefcase