How the simple tool that made flying much safer can also make investing safer

I listened to an NPR podcast (Hidden Brain) about a powerful tool that seems too commonplace to merit much attention: the checklist. But this humble tool has made flying dramatically safer. Here’s the story I heard.

Depression Era Americans were riveted by the wonders of flight technology; all eyes were on an air race for bombers between Douglas and Boeing. Amidst the excitement and patriotism generated by America’s latest success story, Boeing’s technologically advanced ‘Flying Fortress’ tore down a runway in Dayton, Ohio on October 30, 1935 and lifted off. Within seconds it was apparent something was terribly wrong. The nose of the aircraft abruptly pitched up 300 feet, the plane stalled and then plummeted to the ground, bursting into flames. It came in flat, but only three of the five crew managed to survive.

In the investigation that followed, it was determined that nothing went wrong with the plane technically, nor was the training or skill of the crew put in question. What had happened was so banal that it was heartbreaking: the crew had forgotten to unlock the elevator, which determines the angle of the nose, so the pilot couldn’t level off the plane.

Overconfidence is a human bias and the more expert we are, the more susceptible to overlooking the obvious. The military decided that the best way to counter this bias was to employ a simple checklist – based on the most common ways that even an expert could crash a plane – which included such blindingly obvious items that pilots were insulted. But it was so effective that when the civil aviation industry adopted the same practice, flying complex machines became safer than driving your car on a highway. Less than one in 200,000 flights have any kind of a mishap.

How could the checklist be used to make investing safer?

Given the stories of adverse investment experiences I hear as an investment advisor, I decided to turn my hand to drawing up a checklist that would help investors have a better investing experience. The following list takes into account the most common mistakes I see investors making and incorporates a series of checks to avoid these errors.

□   Manage Risk, by setting and maintaining the ratio between stocks and bonds in your portfolio:

□   Balanced profile: 60 – 70% stocks and 30 – 40% bonds

□   Moderate profile: 80% stocks and 20% bonds

□   Conservative profile: 40% stocks and 60% bonds


□   Hold stocks which are diversified in kind: hold both large cap and small cap stocks, and include both high-priced stocks (growth stocks) and low-priced stocks (value stocks, which carry more risk).


□   Diversify stocks geographically to avoid ‘home bias’. Hold stocks from Canada (which represents only 4% of the stocks in the world), United States, Europe, Asia and Emerging Markets.


□   Don’t put all your eggs in one basket: hold lots of securities (a market-based investment or an index fund is a good way of achieving this); and consider owning real estate in your portfolio.


□   Ongoing management of the portfolio: balance the importance of maintaining your chosen risk profile with the related trading costs and tax repercussions.


□   Keep track of the costs associated with your portfolio. Make sure you know how trading costs, fees, commissions, etc. are impacting the returns from your portfolio.


□   Ensure that your portfolio is tax-efficient and ensure you have the expert advice you need to make sure this aspect of investing is being appropriately handled.


□   Review your portfolio with your advisor on a regular basis and update it based on your needs.


When the airline and health industries started to implement checklists, they discovered that they only work if people feel empowered to question the expert or point out that some item on the list is being overlooked. Ask your advisor questions. Ask what checklist he or she uses to avoid making mistakes through inattention.

Daryn Form is a Senior Financial Advisor with Assante Capital Management Ltd. providing wealth management services to principals of family-owned and privately held companies. Assante Capital Management Ltd. is a member of the Canadian Investor Protection Fund and is registered with the Investment Industry Regulatory Organization of Canada.  The information mentioned in this article is for general information only. Please contact him to discuss your particular circumstances prior to acting on the information above.  The opinions expressed are those of the author and not necessarily those of Assante Capital Management Ltd.  Rates are not guaranteed and are subject to change at any time without notice.