The Backpacker’s Guide to Investing – Part 1

My wife and I recently went on a backpacking trip through the beautiful Indian Peaks Wilderness near Lake Granby, CO.

We did a roughly 14 mile roundtrip hike, starting at Monarch Lake and passing by the beautiful Cascade Creek and the four waterfalls that make up the Cascade Falls.

Cascade Falls

I really enjoy backpacking, as it gives me a rare opportunity to disconnect from the world (and technology) and enjoy some uninterrupted time away.

It also gives me a chance to reflect on family, life, business, and other things that I spend my time focused on.

During this past adventure, I got to thinking about the process involved in planning a successful trip. Between mapping out your trek, planning your meals, having the right gear, and properly organizing your pack, there’s quite a bit to do before you hit the trail.

Having done quite a few excursions over the years, a lot of the planning now comes out of habit. However, the steps involved are still critical for several reasons:

  1. We’re avid hikers, so we want to ensure we plan a trip that is worth our while (i.e. it better have some exciting views, picturesque lakes or rivers, etc.)
  2. Safety is of utmost importance. Not only for our own good, but to prevent finding ourselves in a situation that requires help from the authorities.
  3. We want to balance the difficulty of the hike with the time we have available, possible weather conditions, and whoever else we might be going with

In the spirit of full disclosure, I have to give my wife credit, as she did the bulk of the planning for this one. Nonetheless, the process is basically the same regardless of which one of us plans the trip.

All of this got me to thinking about how closely planning a successful backpacking trip resembles the planning process of a successful investor.

Since the parallels are actually pretty striking, I decided to put together this backpacking-themed guide to investing. Hopefully, the analogies resonate with you, even if you aren’t a fellow outdoor enthusiast.

1. Always Have a Plan

Well in advance of setting out on a backpacking excursion, we thoroughly research where we’re headed, what the conditions will be like, and what we’re packing with us. This means laying out the trail map, charting our course, and knowing our waypoints and landmarks.

It also means calculating the distance and changes in elevation along the hike, knowing that some sections are going to test our will much more than others.

It probably goes without saying, but being a successful investor is no different. I always like to say, “if you don’t know where you’re going, how will you know how to get there?”

Whether it’s a quantitative goal (e.g. have $3 million saved by age 65) or a qualitative goal (e.g. have the freedom to quit my job and start a business), simply “living life” and “hoping you get there” is unlikely to be a successful approach.

You need to know where you are today, where you want to go, and what you need to do in order to make it happen. That’s the only way to be confident that you’ll actually hit your target.

Likewise, you need to understand how much risk you’re comfortable taking along the way and what that means for how much you need to save and how you should invest.

2. And a Backup Plan

If there’s one thing you can count on as a backpacker (particularly in Colorado), it’s that things rarely go perfectly according to plan. Between fallen trees causing you to lose the trail or a rainstorm rolling in, you have to be prepared to adapt to whatever mother nature throws at you.

Often this means camping in a different spot than you had planned, taking an alternate trail, or even cutting your trip short in the name of safety.

As an investor, you should have a backup plan as well (probably several of them).

For example, you might have your mind set on retiring at age 62. However, this depends on your investments achieving a certain rate of return. If markets are unkind in the years leading up to your retirement, you might need to reconsider hanging up your cleats early and continue working a few more years.

Whatever the situation might be, you should always have a “plan B” at the ready so that if the unexpected arises (as it often does), you won’t be caught flat-footed.

3. Take Advantage of Limited Resources When They’re Available

Every backpacker knows that the one thing you absolutely cannot live without is water. However, because water is so heavy, you can only pack so much when you leave civilization. That’s why you always:

  1. Ensure there are ample sources of water along your trail. Although a trail map might show a stream or lake, there’s no guarantee it won’t be dried up when you get there. That’s why when planning out your route you always double check that there are several rivers, creeks, or lakes from which you can draw water along your hike.
  2. Fill up on water whenever it’s available. On a long hike, you can sometimes go miles in between sources of water. For that reason, you ALWAYS fill up when water is available. Even if you don’t think you’ll need it, it’s a smart move to get it while you can.

As an investor (in a world with limits on time and money), you need to think the same way and take advantage of the opportunities available to you. For example:

  1. Invest early and often. Time and compound interest are your friend.
  2. Don’t leave free money on the table. The employer match for your 401k could amount to $50,000 to $100,000 or more over your career (and that doesn’t even include the investment returns on that money). However, a lot of employees fail to take full advantage of the match. Don’t let that be you.
  3. Maximize your tax-advantaged retirement accounts. Too often I see people with money in a taxable brokerage account who haven’t maximized there IRA or 401k. Most people can invest $23,000 per year (based on 2014 IRS limits) between their IRA and 401k. So, unless you have a really bad 401k (i.e. high fees), it’s unlikely that putting money in a taxable account is a smart move until you’ve saved at least this much for the year.

Part 1 Wrap-Up

In Part 2 of The Backpacker’s Guide to Investing, we’ll look at the tools of the trade and why function beats form when you’re out in the wilderness. In the meantime, I have a couple questions for you:

  1. Do you have a clear plan for your money and how to put it to work for you?
  2. Are there opportunities you might be missing out on that could help you be more successful?

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