Remember back to when you were in school. Mixed within the classes, lunch, and recess were regularly scheduled safety drills. There were fire drills, tornado drills, and for the Cold War kids, nuclear bomb drills (duck and cover).
I faintly remember the fire drills in grade school. The teachers emphasized walking in a calm, quiet, and orderly fashion, single file out of the classroom, down the stairs, and out the door. Each class had its own predetermined path that finished somewhere outside at a reasonably safe distance from the school.
Back then, it was less a drill and more an excuse to get out of class and outside for a few minutes. But the plan, literally playing follow the leader, was so simple a kid could do it without having to stop and think too much.
The drill made sure we knew what to do when the alarm went off. And it worked. Whenever you hear a fire alarm, you grumble under your breath while you calmly follow the next person down the stairs and outside. We do it whether it’s an emergency or not.
If it sounds a bit Pavlovian, it is. You, me, and everyone else, are trained to respond to that sound. Humbling really, and it beats the alternative – do nothing until you smell smoke, panic, and stampede for the door.
What does this have to do with investing? Human nature has an uncanny way of making things worse.
Think how volatility drives investors to do the wrong thing at the worst possible time, even though it feels right at that moment. This is human nature’s way of protecting you from losses. It drives you to act – to sell, hoping to prevent further losses – except it sticks you with new problems, like when do you buy back in?
If there ever was a case for a calm, orderly reaction to a possible emergency, it would be with investing because the market is nothing more than a series of alarms, both false and real, pushing you to act in ways you shouldn’t.
If you can be trained to react to a bell, there should be a way to introduce a simple system or a few steps to follow so you make calm logical decisions before you make any changes to your portfolio.
Maybe it’s something simple, like a sticky note, slapped to whatever computer screen you use when you make changes to your portfolio. That way you see it every day, maybe even read it every day, so it slowly sinks in.
It should remind you why you invest, what your process or plan is, what you’re time horizon is, that crises are temporary, selling is permanent, and in most cases it should remind you to do nothing.
That may seem counterintuitive, but the market has recovered from every single crash. The investors that survived best had the mental fortitude to do nothing when the world was falling apart while everyone else got swept up in the ensuing panic.
So review your system anytime you feel uneasy or feel you need to do something. Once its been tested, make adjustments. Use that experience to make it work better the next time.
Like the fire drill, your simple plan should be a system that keeps you from panicking, insures against bad judgement, and stops you from making a bad situation worse (or turn a good situation bad) because most of time it’s really just a false alarm.