Defending Against Panic Attacks
In February of 1984, the weather suddenly changed over the Mediterranean. A fierce cold wind enveloped a heavy military helicopter midway between the coast and an island, where it was to drop 12 marine commandos. Without warning, the helicopters' engines iced up and died, leaving the two pilots only seconds to avert disaster. Fortunately, they managed to restart the propeller, and landed peacefully on the ocean with little damage.

Intense relief overcame the passengers, who congratulated each other on their miraculous escape. They radioed a message to summon rescue boats, then relaxed further, becoming euphoric in their praise of the skill of the pilots, and the sturdy construction of the aircraft, designed expressly to maintain buoyancy for several minutes in such conditions.

Unfortunately, this euphoria lasted far too long, and the passengers suddenly realized that the craft was sinking. In a mad rush, they seized the first lifeboat and threw it overboard, forgetting to pull the cord of the gas canister that auto-inflates it. It swiftly sank out of sight. As the water rose further, the now panic-struck passengers rushed about wildly, grabbed the second boat, and not wishing to repeat the same mistake, pulled the auto-inflate cord too soon, while the boat was still inside. It wedged itself firmly inside the compartment, leaving the hapless passengers no option but to jump directly into the cold sea. When rescue craft arrived an hour later, all but one were dead from hypothermia. An avoidable disaster occurred because of the panicky actions of the passengers.

Several factors contributed to disaster here. The first was emotions, both positive and negative. First there was euphoria - a general feeling of extreme safety and contentedness. Next there was fear, quickly followed by panic. Euphoria causes one to ignore risks, while panic causes one to overreact to risks in an inappropriate, self-defeating manner. Both can lead to disaster if allowed to run wild.

Emotions should play no part in investing. Your investment success depends on the quality of your investments, and the price you paid for them, not how excited you are about them. The key is to not own garbage, like speculative stocks with no earnings, or investments that you don't fully understand, such as hedge funds or other investments where you really don't have a clue what they are or how they work. Once you are firmly convinced that you do not have junk in your portfolio, and that you made purchases at reasonable prices, fear and worry will be lessened considerably.

Secondly, panic is more likely in a group than when alone, hence the idea of panic as 'contagious'. If others react quickly and seemingly decisively when faced with danger, the brain often latches onto that behaviour as appropriate. Faced with the need for a fast decision, and with no other immediate alternatives intruding into one's consciousness, the urge to follow the lead of others is almost irresiststible. Unfortunately, often the least rational member of a group is most likely to panic first, taking others with him.

Now, you might think the best way to avoid panic is to simply force yourself to stay calm, and act rationally, but that is easier said than done, particularly if you find yourself in circumstances utterly unlike that which you've ever experienced before. To prepare yourself to avoid panic requires practice until you react automatically to the danger.

This training becomes almost fanatical in the case of helicopter pilots, who have approximately three seconds to carry out a single, critical action in case of any hint of engine failure (lowering the "collective" control to cause the blades to autogyro). Failing to accomplish this task results in the helicopter taking on the aerodynamics of a set of car keys.

Panic! How it Works and What To Do About It

How does this apply to investing in financial markets? Well, you can 'practice' market disruptions by learning how very common they are, by being aware of what has happened historically, and expecting them. For instance, of the last 11 market shocks similar to the current one, the median return the following 3, 6 and 12 months were +6.6%, +12.6%, and +18.9% respectively.

Source: Looking Beyond This Week's Market Turmoil, Daniel E. Chornous, Chief Investment Officer, RBC Asset Management, August 2007

Finally, knowing that these events are very likely to arrive on a regular basis, it is important to ask yourself the question, "what strategy would have been most successful in the past at avoiding any permanent damage from such events? There are two answers: diversification, and a long-term perspective. Sometimes, clients ask me, " why don't we just put everything into banks, or income trusts," …. or resources, or high-tech, or whatever seems invincible at the time. The answer is that history shows that to be a sure route to disaster, because eventually your favoured sector will get blindsided by a totally unexpected problem, causing your portfolio heavy losses, sometimes irreparable.

A long-term perspective means you make a plan, and stick to it regardless of the short-term situation. The majority of investors worry too much about the short-term: your advantage, should you choose to accept it, is to ignore short-term fluctuations, and stay committed to a plan that is proven to work over time. Overwhelmingly, the evidence supports the notion that trying to trade the market is futile, and tends to only enrich the financial community at your expense. Make a sound plan, then stay the course.

Finally, most people could use the services of an experienced leader. I remember well the crash of 87, the Japanese stock market meltdown of the 90's, the Russian debt crisis of 98, and the hi-tech meltdown of 2001. I can help you prepare for the future, regardless of what it might be. Feel free to give me a call at any time, with no obligation. Our team is devoted to providing superior service and advice, protect your capital, while beating inflation and taxes. It would be well worth your time to get a second opinion.

Sincerely,

Scott Swallow, HBA, MBA, CIM