In a recent blog post, marketing guru and bestselling author Seth Godin discusses the importance of designing a system to anticipate and allow for severe stress—since immediate reactionary measures to negative situations can have significant adverse effects. He calls this “The Panic Tax.”
Godin’s blog is as much about human behavior as it is marketing—so it’s no surprise that his writings often have insights that relate to investing as well.
One doesn’t have to reach very far back into our history (think 2008) to know that periods of severe stress occur from time to time in the financial system. Let’s take a look at several of Seth’s recommendations, and how they relate to investing.
1. “The cost of ameliorating panic in your system is always less than the cost of the lost productivity when panic hits.”
When investing, you can expect to experience severe market corrections from time to time. Planning for this ahead of time (by making sure you are diversified and comfortable with the level of risk in your portfolio) is key. The willingness to stick with your strategy in times of stress (ameliorating panic) is much less painful over the long haul than the subpar returns that can come with panicked behavior.
2. "Slack is the enemy of panic."
Building in slack is an important part of creating a strong investment portfolio. After a great 5 year run like we’ve had in U.S. stocks, it may not feel necessary to diversify. However, owning things like bonds (or even cash) in your portfolio can provide the necessary protection (the “slack”) to stick with your investment strategy in times of market panic.
3. “Media voices, politicians and others that create panic for a living need to own responsibility for the way their actions dramatically magnify the cost we all pay.”
It’s important to remember that financial media exists for one purpose—ratings. It’s not there to break actionable news (since someone or something will always be faster), give you profitable trading advice, or make you smarter. They simply want as many eyeballs as possible, and will resort to all manner of hype necessary to get them.
4. “The answer to, "should we panic," is always no. Always. Panic is expensive, panic compounds and panic doesn't solve the problem.”
Panic is costly when it comes to investing. How many people panicked in 2008/2009 and sold out of stocks—only to miss one of the best 5-year market runs in history? This reaction doesn’t move you closer to your financial goals. It’s why planning ahead, agreeing on how much risk to take with your portfolio, and setting expectations are all necessary preemptive steps—and an important part of “not panicking” when everyone around you is.
5. “They call them panic attacks for a reason. After-action review, an attack-analysis session, ought to be held whenever a system freezes under panic.”
Maybe you did panic in 2008. While we can’t go back and change the past, we do have an opportunity to review the experience and seek to correct it moving forward.
For instance, maybe you were taking on more risk with your portfolio than you were comfortable with. Maybe you didn’t have an investment strategy in place (one you could commit to through good times and the bad). Learn from the past and get these in place before the panic attack happens.
Negative situations are a fact of life, but panic doesn’t have to be. When it comes to your investment strategy, take protective measures to fortify against panic and move toward the future with confidence.
Interested in learning more about how Cordant can help you avoid panic and optimize your investment strategy? Give us a call at 503.621.9207.