Investing with the Automatic Pilot

airplaneOver the last few years, investing has been like flying a passenger jet in near perfect weather conditions.

Sure, things started off rough in 2008/9, there was the odd squall in 2011 and there have often been storm clouds on the horizon.

But, for the most part, there has been a tailwind, no turbulence and the Captain has been able to turn on the automatic pilot, enjoy the inflight meal and flirt with the cabin crew.

2014 has been another year of strong investment returns.  This won’t last forever.  But even when the inevitable bear market appears, if we have a robust investment process, we can keep doing the right things.

In investing you can never directly control the results – the market dictates those – you can only control your own actions.  That’s why its important to have an investment process to help embed the behaviours that help us buy low, hold for the long term and (eventually) sell high.

I used to think investing was exciting.  And, unfortunately, the way I did it in my twenties was exciting.  I dabbled in Internet shares, mining shares, biotech shares, leveraged property shares.  Many new investors go through this “lottery ticket” stock phase. If they are lucky, they get through it without losing too much money.

We all have to go through a learning period when investing.  My early stockpicking experiences taught me how much I didn’t know. On the other side, lies self awareness and a knowledge of our own limitations.

The thrill of profits and, even more, the sting of losses prompted me to learn, experiment and improve my investing process.

A good investment process should be steady and a bit dull, like an automatic pilot flying a jumbo jet.  A jumbo jet is basically a flying bomb – a metal tube full of explosive fuel and people being propelled through the air at 600 miles an hour. There is already more than enough risk and complexity to make it interesting.  The journey does not need to be livened up by the pilot looping the loop along the way.

The emotional mind set of the investor is key to good investing. The same goes for flying.  Personally, I never get on a plane where I see the Captain do any of the following:

  • whooping or high fiving the passengers or other crew
  • praying
  • crying
  • crossing themselves
  • sniffing white powder through a rolled up banknote

In my investing, I aim to minimise the amount of excitement and activity in my portfolio.   I try to eliminate fear, hope and wishful thinking from my process and replace emotions with rationality and equanimity.  When investing, you need to embrace your inner airline pilot.

Try this thought experiment.  Imagine you are a passenger on a commercial airline.  What does your ideal pilot look like?  You can understand a lot about investment process by visualising this.

They will not be very young – you want experience and wisdom.  They may have hair flecked with silver.   They will be sober. They will have got plenty of sleep the night before.  They will speak calmly and logically in a way that indicates composure and experience.

They will make quick decisions when they have to but will try to avoid flying by the seat of their pants.   Mostly they bypass problems by anticipating and avoiding them.

Most of the time the ideal airline pilot does nothing at all. They remain alert and thoughtful.  They let the automatic pilot or the co-pilot fly the plane and are ready for the (very small) minority of situations where manual overide is required.

Over the years, the more I have learned about investing, the simpler it has became. Part of this is simply tuning out the noise.  When I commuted into work in the City each day, I was surrounded by a cacophony of investment misinformation. From the active fund billboards at my local station to the Sky News on the TV in the office, I was surrounded by a tsunami of misinformation about how complex and scary investing is.

Living in the Prison Camp, we often get stressed by work, commuting and the background noise of consumer society. A big part of good investing is just managing to tune out the noise.  It’s no accident that Warren Buffett bases himself in a quiet office in Omaha and not on a trading floor on Wall Street.

The financial media is full of the stunts, crashes and bodycounts of the investing world.  Sensible investors ignore this, as do pilots.   If the pilot wants to know what is going on in the world, they look out the window (direct observation) or at the instrumentation (primary sources) or they listen to air traffic control (unbiased external sources of reliable information).

Its so important not to let your investments be dictated by what you read about in the media.  This will lead you to buy high and sell low.  If you are human (I’m assuming that most of the readers of this site are) then resisting the pressures of the media is really, really difficult.

Keep-calm-and-carry-onI think the hardest part of investing is resisting the urge to bail out of an under-performing stock (or index).   Our brain processes investment losses like a snake bite: our natural reactions tell us to run away from things that have hurt us. If you see everyone else around you running away at the same time, the urge to sell regardless of price becomes almost irresistible.

If you pay attention to the financial media, you are making it even harder for yourself.  The hardest thing to do is hold BP after the news of the Macondo oil spill is everywhere.  In these situations, journalists are as likely to write balanced articles as a piranha is when there is blood in the water and a feeding frenzy in progress.  At this point, when the share price has already tanked, sometimes the best thing to do is nothing.  Keep Calm and Carry On.

Start by programming the automatic pilot with the destination.  In investing terms, this includes your target asset allocation (how your portfolio is split between shares, property, bonds etc).

Your asset allocation is an aide to steering the “plane”.  Market fluctuations are like turbulence in the atmosphere.  They are a normal part of investing, not something to be surprised by.  They can blow you off course, but an asset allocation target helps you steer back towards your investment destination.

As you proceed on your investment journey, make a series of small adjustments to stay on track just as a pilot makes gradual adjustments to direction, altitude and speed. In investing, this process of adjustment is done by redirecting new savings and periodic rebalancing. I recommend paying yourself first: use a direct debit to deduct as much as you can straight after your salary is paid and invest this consistent with your asset allocation.

Comparing your target asset allocation with your actual current asset allocation provides a guide where to invest new savings and automatically embeds a tendency to buy low and sell high.  For example, when equity markets have been strong and we exceed our target % in shares, we can direct new savings to the bond element of the portfolio.  Decision made automatically.

Economy of action is important to minimise costs. A good pilot flies smoothly and reduces fuel costs. Similarly a good investor avoids overtrading and reduces transaction costs.  So part of my investment process is sticking to a minimum transaction size.

Over recent years I’ve reduced churn in my active portfolio. In 2012, I bought 14 new stocks, 11 in 2013 and just 3 in 2014.  One of the ways I reduce activity is a rule that says never buy a share without a cooling off period – I always let 48 hours pass between completing my research on a stock and pulling the trigger.  Similarly, I never buy or sell anything if I am tired, hungover or stressed.

Pilots need to know a bit about weather patterns and some basic geography.  But they don’t need to be weather forecasters. They do not need to predict cloud formation, precipitation and wind currents based on the accumulation of ions in the stratosphere or whatever.

Pilots deal with the reality in front of them. If the pilot needed to successfully forecast the weather in order to get safely to the destination, then most people would (sensibly) never get on the plane. These people inherently know that long range weather forecasts are useless. So why do the same people read financial media and then invest based on forecasts of future GDP or interest rates or other macro data?

The pilot analogy even works for the active versus passive debate.  A Vanguard index fund is like catching a scheduled flight on a Boeing 747 guided by autopilot – its a cost effective and rational choice.  A bit boring, but you’ll get to the destination safely.  Picking individual stocks is more like flying your own private jet – it looks more glamorous and can be fun but it’s probably more dangerous.



Financial Coaching



  1. More top-notch writing as usual TEA. Great stuff. Enjoy the rest of your christmas holiday 🙂

    1. Thanks! I have a feeling that 2015 is going to be great…

  2. Hi TEA

    Great analogy. I am probably in the private jet category, not because I have loads of money, but because I enjoy the involvement of the direct investing process.

    The comments you make about where a pilot gets his information from, and which he ignores is very relevant, however there is nothing wrong with listening to the other sources so long as you make your decisions on the reliable ones.

    Hope you had a great Christmas, and have a Happy New Year
    FI UK

    1. FI UK – Thanks – I agree you don’t need loadsamoney to invest direct….I use the phrase resources in a broad sense….including the capacity for learning and emotional stability.

  3. Great post. In investing, process really matters but difficult for most to implement with discipline. It took me a while to get this partially right but it is worth it and has reduced the stress in investing in individual equities. We have no index funds in Nigeria so one has to invest the hard way.

    1. Great to have a comment from Nigeria….I checked out your website and you are a testament to globalisation! All the best

  4. Hello,

    The tail wind of the last few years has been ace, but for a lot of us (me included) it’s all we’ve known from an investing point of view. Going to be a hell of a lesson in the next down turn!

    Found the article really motivating. Bring on 2015.

    Happy Christmas holidays all. 🙂

    Mr Z

    1. Mr Z

      Thanks….by the way, I am currently watching The Walking Dead which we started on a Boxing Day Boxset Binge…it is gripping stuff with just enough FI & personal development analogies to be Escape Artist recommended viewing…


  5. Good stuff, not new to me as such but although I’ve been in index trackers for years and happily sat out several bear markets in a state of almost blissful ignorance, with my “early retirement awakening” about a year ago I’m keeping more of an eye on my net worth these days and am perhaps paradoxically more at risk of panicking, so a reminder is always welcome. At the same time I’m actually quite looking forward to the next bear market, as long as I keep my job (being still in the wealth accumulation phase), I anticipate enjoying buying index funds with my monthly pension contribution at a massive discount to what I’ve been paying until now. Perhaps I’m deluding myself. 🙂

    On a slightly tangential subject, and I appreciate this might either be too personal or something you’d consider too close to “advice” to want to risk making a statement on, have you exceeded the FSCS £50k compensation limit on investments with Vanguard (or anyone else, for that matter) and are you at all concerned about that, or do you trust them enough that you’re just not worried about it? I am in one Vanguard fund and they’re so cheap and well-spoken of I’d like to invest more, but that £50k threshold is making me spread my investments around a bit more than I otherwise would. (That £50k compensation limit is from memory, I tried to confirm it with a web search but struggled somewhat, so apologies if it’s wrong.)

    1. Steve. The short answer is that I have more than £50k with Vanguard and I don’t worry about it. Vanguard looks to me like a conservatively run business run by people with integrity. But even if Vanguard did go bust, this does not mean I would lose my assets….these are separated as client money and held by a custodian and these segregation arrangements should be monitored by the FCA.

      1. Thank you, much appreciated!

  6. Great article and great reminder for us all to ‘Keep Calm and Carry On” when the going gets tough! Aside from a few small wobbles this year, the urge to press my ‘panic button’ has yet to be severely tested but I think I will be able to ignore all the chatter!

    And The Walking Dead is an excellent series, with the current one being one of the best so far!

  7. Love your analogy on Vanguard funds and autopilot. At the end of the day, I’d rather not risk my prospects of being financially independent for the sake of greater gains. Like you say, reaching the destination safely is of prime importance.

  8. […] the trigger, I fortuitously stumbled upon this article by the Escape Artist. Then read this and this. And found out what safe withdrawal rate meant here! Nothing to persuade me to give it a go more […]

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