What color is your parachute?
If your answer to that question is: "what parachute?" then we need to have a serious talk…
Anyone can jump out of a plane, you open the door and jump – this is not brain surgery. The trick is not to die in the process! Gravity is a nasty, royal bitch and has been successfully conquered by exactly none of the approximately 100Bn people who have ever lived. Of the 94Bn people who have died, only one is even rumored to have come back so generally, when jumping out of planes, we find it advisable to employ some sort of safety device commonly known as a parachute.
Yet when we buy stocks and calls, why are we are tossing our money into the air and yelling "Fly, fly!" with no actual plan as to how to save our investments should that flying thing not work out?
Sage just wrote a wonderful article about hedging, this is akin to preparing for your jump by packing your chute, checking your straps and cords and making sure everything is in order before you go check to see if you will be the first person who ever actually flew (and if you’ve jumped out of a plane, you know you thought about it the first time). So I urge you to read that article and take the advice to heart for the next time we try to make our money fly but this isn’t an article about that. Today we have advice for the unprepared.
The prepared don’t need our help, they have a chute and a backup chute. They’ve praciced on the ground and they’ve tandem jumped with an instructor and they’ve had a few practice runs with automatic chute deployments until they got comfortable determining how much freefall they could safely handle before pulling the cord. Even with all this training and preparation, most reserve parachutes still have an automatic activation device (what we call a hard stop) which trigger before they fall below the safety zone (2,500 ft).
All this hard work and preparation keep all but around 30 of the 166,000 people who jump out of planes with parachutes each year from dying (no safety system is flawless) – this is a vast improvement over the 100% fatality rate for people who jump out of airplanes without a safety device.