Summer is upon us here in the Carolinas and we can expect our share of strong thunderstorms and localized flooding during this season. As humans though, we have a way of surviving extreme weather. We’ll adjust our travel routes and times to best handle the storms until things get back to normal. I recently learned how another native resident of the Carolinas, fire ants, deal with these extreme conditions. It turns out that fire ants have developed specific traits and techniques for surviving floods that we as investors can learn from when it comes to managing our portfolios during stressful times.
- They Rely on their Natural Survival Traits
When floods hit, fire ants group together to form incredible floating islands to protect their queen and preserve their larvae for future generations. How do they do it?
Fire ants have naturally repellent exoskeletons that cause water droplets to roll off their backs, keeping them dry. They can also trap air bubbles against their bodies, making them buoyant. When thousands of fire ants group together, these traits allow the colony to float together on seemingly treacherous flood waters.
We as investors can also develop our exoskeleton to repel all the investment noise that bombards us and often distracts us from our long-term goals. We could couple this with a system to trap the good noise like the advice that comes from a trusted financial advisor!
- They Follow a Repeatable Process
Fire ants have been through this before. They know the drill and they know how to mobilize, and can do so in as little as 2 minutes – but it’s a process not a panic.
We greatly benefit from a repeatable process of our own so that the next time there’s panic in the markets, we know exactly what to do. We’re going to remind ourselves that there are normal market downturns, but that we have well thought out, diversified portfolios that we’re not going to change to try to dodge the next temporary market drop.
- They Rebalance!
As their raft survives out on the open waters, the fire ants occasionally need to change their individual positions due to workload management, and some of the ants may even get picked off by fish swimming underneath the raft. Interestingly, research indicates that the fire ants rebalance their raft to keep a fixed ratio between the ants on the top of the raft and the ants on the bottom part of the raft.
As investors, we know that rebalancing is a great way to deal with market downturns. Rebalancing prescribes selling assets that have increased in relative value and buying assets that have decreased in relative value. Typically, bonds will increase in value during stock market downturns, so oftentimes investors will sell their appreciated bond holdings and buy lower priced stock holdings when rebalancing their portfolio.
Fire ants know that summer storms will be a rough ride: they may get thrown off course, and they may be uncomfortable for some time. But they also know to rely on what has always worked for them until the floods subside and they can resume their normal day-to-day routine.
We know that as investors, there will be rough times. It’s simply part of the process – we should learn to expect it. We’d do well to develop traits that help shield us from outside investment noise. And, we should have a repeatable process for dealing with difficult market conditions in order to minimize panic and protect ourselves from upending our long-term goals.
Photo Credit: Cabezonication via iStockphoto.com