“This is a test; this is only a test. Had this been an actual emergency …”
There is nothing new here. I am only repeating what you have probably heard me say many times. You can skip this blog post and carry straight on but if you would like to hear my witterings about it again, here goes…
The truth is, the markets are not tanking as I write this piece. In fact, overall market temperatures have been so mild for so long, many newer investors have yet to weather a perfect market storm. Even if you have, you may have forgotten how panic-inducing those times can be.
This worries me.
Experience and evidence alike show us how severely bear markets test investor resolve, sabotage otherwise solid plans, and are just plainly painful. I’ve also seen how damaging it can be to act on rash fear rather than rational resolve during market downturns.
So, let’s pretend, shall we? Just as we prepare for other emergencies by practicing how to avoid deadly blunders in the heat of the moment, here are 10 timely actions you can take when financial markets are tanking … and, frankly, even when they’re not.
- Don’t panic (or pretend not to).
It’s easy to believe you’re immune from panic when the financial sun is shining, but it’s hard to avoid indulging in it during a crisis. If you’re entertaining seemingly logical excuses to bail out during a steep or sustained market downturn, remember:
It’s highly likely your behavioural biases are doing the talking.
Even if you only pretend to be calm, that’s fine, as long as it prevents you from acting on your fears.
- Redirect your energy.
No matter how logical it may be to sit on your hands during market downturns, your “fight or flight” instincts can trick you into acting anyway. Fortunately, there are productive moves you can make instead – such as all 10 actions here – to satisfy the itch to act without overhauling your investments at potentially the worst possible time.
- Remember the evidence.
One way to ignore your self-doubts during market crises is to heed what decades of practical and academic evidence have taught us about investing:
Capital markets’ long-term trajectories have been upward.
Thus, if you sell when markets are down, you’re far more likely to lock in permanent losses than come out ahead.
“Do the math. Expect catastrophes. Whatever happens, stay the course.” – William Bernstein, MD, PhD, financial theorist and neurologist
- Manage your exposure to breaking news.
There’s a difference between following current events versus fixating on them. In today’s multitasking, multimedia world, it’s easier than ever to be inundated by late-breaking news. When you become mired in the minutiae, it’s hard to retain your long-term perspective.
“Choosing what to ignore – turning off constant market updates, tuning out pundits purveying the latest Armageddon – is critical to maintaining a long-term focus.” – Jason Zweig, The Wall Street Journal
- Revisit our carefully crafted investment plans (or make some).
Even if you yearn to go by gut feel during a financial crisis, remember:
You promised yourself you wouldn’t do that.
When did you promise? When we planned your personalised investment portfolio, carefully allocated to various sources of expected returns, globally diversified to dampen the risks involved, and sensibly executed with low-cost funds managed in an evidence-based manner. What if you’ve not yet made these sorts of plans or established this kind of portfolio? Then these are actions we encourage you to take at your earliest convenience.
“The key to successful investing is to get the plan right and then stick to it. This means acting just like the lowly postage stamp that does one thing but does it well. It sticks to its letter until it reaches its destination. The investors’ job is to stick to their well thought out plan (if they have one) until they reach their destination. And if they don’t have a plan, write one immediately.” – Larry Swedroe, financial author
- Reconsider your risk tolerance (but don’t act on it just yet).
When we craft a personalised investment portfolio, you also commit to accepting a measure of market risk in exchange for those expected market returns. Unfortunately, during quiet times, it’s easy to overestimate how much risk you can stomach. If you discover you’re miserable to the point of breaking during even modest market declines, you may need to re-think your investment plans. Start planning for prudent portfolio adjustments, preferably working with us or your own objective advisor to help you implement them judiciously over time.
- Double down on your risk exposure – if you’re able.
If, on the other hand, you discover you’ve got nerves of steel, market downturns can be opportunities to buy more of the depressed (low-price) holdings that fit into your long-range investment plan. You can do this with new money, or by rebalancing what you’ve got (selling appreciated assets to buy the underdogs).
This is not for the timid! You’re buying holdings other investors are fleeing in droves.
But if you’re able to do this and hold tight, you’re especially well-positioned to make the most of the expected recovery.
“Pick your risk exposure, and then diversify the hell out of it.” – Eugene Fama, Nobel laureate economist
- Tax-loss harvest.
Depending on market conditions as well as your own circumstances, you may be able to use tax-loss harvesting to turn financial lemons into lemonade during market downturns. A successful tax-loss harvest lowers your tax bill without substantially altering or impacting your long-term investment outcomes. This action is not without its tricks and traps, however, so it’s best done in alliance with a financial professional who is well-versed in navigating the challenges involved. We do this for you!
- Revisit this article.
There is no better time to re-read this article than when today’s “safety drill” is no longer an exercise but a real event. Maybe it will take your mind off the barrage of breaking news.
“We’d never buy a shirt for full price then be O.K. returning it in exchange for the sale price. ‘Scary’ markets convince people this unequal exchange makes sense.” – Carl Richards, Behavior Gap
- Talk to me.
I don’t know when. I don’t know how severe it will be, or how long it will last. But sooner or later, I expect the markets will tank again for a while, just as I also expect they’ll eventually recover and continue upward. I hope today’s drill will help you be better prepared for “next time.”
I also hope you’ll be in touch if I can help. After all, there’s never a bad time to receive good advice.
“Permanent loss in a well-diversified investment portfolio is always a human achievement, of which the market itself is incapable” Nick Murray.