Preparing for downturns is like landing airplanes without engines: you have to practice

October 06, 2017

“For 42 years, I’ve been making small, regular deposits in this bank of experience, education, and training. And on January 15th, the balance was sufficient so that I could make a sudden large withdrawal.” – Captain Chesley “Sully” Sullenberger, the pilot who successfully landed a flight on the Hudson River after birds knocked out both engines. He saved all 155 lives onboard that day in January 2009.

I like that quote on many levels. The idea that you have to work at something ahead of time is important to investments. The past eight years or so have been relatively easy times in the investment world, or at least the portion of it we grace with our presence. This is not always going to be the case.

At some point in the future, it could be in a few months, it could be more than a decade away, we'll have another deep recession or crisis. In all of our clients' portfolios, some protection for this scenario is designed in. But a significant risk is behavior change, or, more colloquially, "buying high and selling low."

As an investor, it's much easier to say or think you'll avoid this than it is to actually do so. So, as any good Puritan schoolteacher would, we're going to encourage you to prepare ahead of time. As was the case with Captain Sullenberger, you have to practice. Here are three techniques:

1. Do not watch markets on a daily or weekly basis. Market movements are great for the purveyors of financial media, but watching them actively creates an underlying habit that will lead to anxiety. You cannot control the movement of markets, and something that is important but not controllable is a recipe for stress. In a recession or down market you have a better chance of staying the course if you ignore the newstream.

2. Try to focus on the number of shares you own in an index fund, and not the dollar value of the account. I mean, actually know the number. The number of shares is your growing business - it is these shares that will pay dividends and interest in retirement. Because it is good for you to acquire more of them over time (something we'll be steadily attempting to do for many clients), when they get cheaper it may perk you up.

About a decade ago I did a 6-month experiment on myself. I cut out a sheet of paper such that it screened the dollar values of all of my accounts, so I could only see the share totals when I looked at the computer screen. This worked well - I began viewing the shares as my business, and market movements receded in importance.

3. If you must ignore my second point above and you look at the dollar value of your investments, pretend it is 75% of what it is. This is a psychological technique that can help you prepare for a downturn. You are building an expectation buffer in your mind. Someday, if reality meets that reduced level, it won't feel as shocking because mentally you are already there.

It's difficult to overstate the importance of prior practice. Some people don't have to work at it - they're not particularly interested anyway. They're lucky. For everyone else, if you want your own version of landing an Airbus on a river without engines, you have to fire up the mental practice gym.

Dan Cunningham