How to Panic-Proof Your Investing

Whether facing a public health emergency or a market downturn, the worst response is panic. By definition, panic maximizes fear and minimizes logical thinking. Often, panicked responses inflict more harm than whatever caused the panic in the first place.

Perhaps someday historians will reach conclusions about the degree to which various public-policy responses to COVID-19 were prompted by panic. But we can already judge that the stock market’s early reaction to coronavirus concerns was one of panic. Indeed, from late-February through mid-March of last year, investors engaged in widespread “panic selling” — to quote various news accounts of the time — driving one of the most abrupt downturns in market history. (In response to a hefty assist from the Federal Reserve, the panic subsided and the market reversed course.)

Although the human tendency to panic in fearful situations is understandable, panic is rarely helpful or productive. In the face of fear or danger, it is far better to keep your composure, at least as much as possible! The good news, as it regards your investing, is that you can take steps now that will help you stay steady and calm when the next “panicky” time comes.

Fight panic by being prepared

Although the long-term trend of the stock market is upward, the market is subject to reversals, sometimes sharp reversals. We all know that, and yet during times when the market is advancing steadily, it’s easy to get lulled into thinking that there is more smooth sailing ahead. Perhaps there is. But we don’t know that for sure. In fact, we can’t know it. So be prepared at all times for storms and choppy seas. Older investors (i.e., retirees and near-retirees) can prepare for market pullbacks by employing a “bucket strategy.” This involves setting aside two or three years' worth of living expenses in a savings-type investment (such as a savings account, CD, short-term bond fund), instead of leaving that soon-to-be-needed money exposed to the vagaries of the market. Knowing you have enough money at hand to cover near-term living expenses, and therefore you won’t need to withdraw investment money during a downturn, can help you remain calm during a market storm. For younger investors, who still have decades to go before needing to withdraw any investing funds, preparing for a downturn is primarily mental/emotional. By studying market history, a younger investor can remain confident that reversals ultimately give way to advances. And they can know that continuing to make regular investments throughout a downturn likely will result in robust long-term returns.

Fight panic with a written plan

Staying calm is much easier if you have a written document that spells out your investing objectives and strategies — including what you will do when market reversals occur. Putting your plan in writing helps make it more concrete, and it provides you a document to consult during times of market stress.

By its nature, panic tends to “short-circuit” one’s reason and logic, so a written plan that you composed during a time of calm reflection can remind you of the logical reasoning you’ve already applied to your financial situation. For example, a younger investor’s document might include something like: “Because I have many years ahead before retirement, I will weather downturns and continue to invest steadily using a dollar-cost averaging approach.”

An older investor’s document might read: “Because I am using a ‘bucket approach’ to provide for spending needs in the near-term, I can afford to ride out a market downturn and allow my longer-term assets to recover their value.”

Fight panic with a suitable portfolio

A great aid to keeping panic in check is to have a portfolio suited to 1) your age and 2) your tolerance for investing risk. SMI's “Start Here” section can help you apply these considerations to your asset-allocation decision.

An investor in his or her mid-60s shouldn’t be assuming the same overall risk as a 30-year-old investor. This is why most of SMI’s asset-allocation models gradually reduce equity holdings and ramp up bond holdings as an investor moves through the seasons of life. (The Dynamic Asset Allocation strategy uses a different approach.)

Knowing your asset allocation is appropriate for your “season” can help you keep calm during downturns. A younger investor can appropriately view market pullbacks as a “stocks are on sale” buying opportunity. Older investors can rest assured that the “ballast” offered by their bond holdings will help smooth out the volatility of a tumultuous market.

A portfolio principle that applies to all investors — younger, older, or in between — is diversification: “Invest in se ven ventures, yes, in eight; you do not know what disaster may come upon the land” (Ecclesiastes 11:2). By keeping you from “having too many eggs in one basket,” diversification typically offers significant protection during downturns.

SMI’s core strategies (Just-the-Basic, Fund Upgrading, and Dynamic Asset Allocation) have diversification built-in. Depending on the strategy — or blend of strategies — you adopt, your portfolio will be broadly diversified among the stocks of both large and small companies and (if called for) an array of bonds. At times (and, again, depending on the particular strategy), your holdings might also be diversified among foreign stocks, real estate, gold, or cash.

Fight panic through prayer

There is no better antidote to panic than prayer. Prayerfully recalling what God has said in Scripture about his care and concern for us can help you remain calm and confident, regardless of the immediate circumstances. As Isaiah 26:3 (NLT) says of God, “Yo u will keep in perfect peace all who trust in you, all whose thoughts are fixed on you!” SMI members can testify to the reality of that “perfect peace.” A few months ago, many of them told us about the sense of calm they had during last year’s unprecedented COVID-induced downturn. Through prayer and meditating on Scripture, they held on to a deep assurance that, no matter what might come, God would “never leave [them] or forsake [them]” (Hebrews 13:5).

Keep calm and carry on

By getting prepared, writing out a plan, building a suitable portfolio, and being a person of prayer, you’ll be ready to face whatever may be ahead. When the investing seas get choppy and other investors start to panic, you’ll be able to keep a steady hand on the tiller.