What to do when panic hits?

When things go wrong, people start to behave erratically.

We get nervous and hysterical and rush around when we shouldn’t move – or we freeze up and stay stuck in place when we should run. We forget simple things we were taught in calmer times, become angry or emotional (or both) and end up making poor individual and group decisions.

Turbulence on a plane. A traffic jam lasting too long. A fierce storm causing a blackout. News headlines about nuclear war, or a flood, or a virus. A loud noise on a lonely road¹. The four horsemen of the Apocalypse start trampling through our brains, and we panic.

But there are exceptions to the rule. Firefighters, the police, or paramedics. Mountain rescue teams and lifeboat crews. Pilots and train drivers. Governments (in theory). People and organisations who don’t panic when the world changes abruptly.

Financial markets often seem notably absent of these kinds of people – there’s no official “market rescue” team which swings into action with blue lights flashing and helicopters hovering. But there are some valuable lessons to be learnt from all the panic-free professionals which apply to behaviour during financial market wobbles.

Planning for panic

The phrase “panic stations” is often used interchangeably with “panic” to describe frantic behaviour when things start going wrong – blame Corporal Jones. But that’s wrong. “Panic stations” comes from the Royal Navy; it was a command for sailors to move to specific pre-assigned positions when something unexpected happened.

With each sailor knowing where they should be and what they should be doing, the sense of individual panic reduced – you’d go to your position and get on with your assigned task. This then gave the officers in charge a better chance of dealing with the crisis; using the full and calm resource of the ship, rather than a group of chaotic, panicked individuals.

“Panic stations” was a plan to reduce panic.

And the organisations mentioned above all have their own versions and plans to deal with emergencies. Call 999, and the operators have a script to guide them – getting you through to who you need to talk to with as much information as possible – and when the emergency services arrive, they have a checklist of actions to take, depending on the situation. The RNLI has detailed plans of how to deal with everything – for example, their search and rescue check cards cover the location, the weather, the type of accident, and even how to deploy different search patterns most effectively. They have their “panic stations” and they follow the plan every time.

Financial panic stations

Financial market panics are no different to those above. Scared people behaving irrationally in response to some threat (real or imagined).

Certainly at the moment, nine months into 2022, there’s enough around to worry about. Whether it’s Putin’s aggression in Europe, inflation, interest rates, a tech bubble, a crypto crash, Chinese economic stagnation, US politics, or the climate emergency, financial fears are rapidly climbing.

As financial professionals, we need to have planned panic stations. Importantly, these differ, depending on our roles. On a crisis-hit ship, the engineers wouldn’t man the guns, nor would the galley-cooks begin navigation. Different strengths require different stations and different actions.

As investment managers, we believe our focus should be on dealing correctly with the investment decisions within our control. Our panic stations involve using quantitative models and dashboards to calm ourselves and make the right decisions to grow capital for our clients over the long term.

For advisers, their plan of action in times of stress is just as important. Most of our adviser partners tell us that their panic stations are centred around communications to clients. Knowing which clients will need a regular email, and who might prefer a phone call. Knowing which clients don’t need anything at all, and which clients just say they don’t need anything at all!

We think this approach – this dividing of responsibilities to the client – is absolutely the right one, especially in scary times. Understanding the investment world and understanding individual clients are both incredibly complex and time-consuming tasks; especially at stressful, panic-inducing moments.

In running our model portfolios for over ten years, we’ve been at panic stations a few times (Eurozone crisis, Brexit, COVID) – and each time the plan has worked. We’ve looked after the investments, while the advisers have looked after the clients. The performance of the portfolios has delivered very strong returns, and clients have remained calm enough to stick to their plans.

Knowing what you don’t have to worry about when things get tough is incredibly calming – leave the investing to us, while you focus on your clients.

¹ The origin of the word “panic” is Greek; Pan was the god of woods and fields who made the mysterious sounds and noises which frightened people in remote places.