When crisis hits, sit back and do nothing

In the aftermath of the financial crisis that began in 2008 and bottomed out in 2009, I learned from a friend that his retired father had been forced to go back to work.

The good news was that he was a doctor and would be well paid for what he did. The not so good news was that the stock market collapse had taken a significant portion of his retirement savings.

Fearing things could get even worse, he locked in his losses by selling a lot of his holdings. As it turned out, he sold at pretty much the point of maximum pessimism, and soon after things began to recover.

My friend’s father would have done very well if he’d hung on. Instead, he missed all of the gains that followed by making a hasty decision at the wrong time.

I was reminded of the story this week while reading two books by Tom Bradley, who co-founded Vancouver-based Steadyhand Investment Funds. Bradley has written in the financial press for many years and also blogs on his website.

It’s Not Rocket Science and the sequel It’s Still Not Rocket Science are quick reads and available for free from the Steadyhand website. They can be downloaded, or you can request hard copies in the mail.

The books compile Bradley’s articles going back about a decade, and were sent my way following a column about Market Masters, a book based on interviews with some of Canada’s most successful money managers. I liked the book because Market Masters looked at the way these experts think and offered an explanation of the principles guiding their strategies.

Both of Bradley’s books are full of the same sort of commentary, what he calls plain-English advice about investing. You won’t find stock picks, but rather the things that precede them — understanding risk, having a plan, discipline, the importance of patience and diversification.

As he said in an interview, “The time when you need to lean on your plan most is when you trust it the least.”

One of the articles was written in May 2010, not long after my friend’s father had bailed out. The topic was what you should do when markets crash — when you’re petrified, have no idea what’s going on but have an overwhelming urge to do something.

Bradley’s first experience with that was in 1987. The scale of that collapse hadn’t been seen since the 1930s, and he was like a deer caught in headlights — unable to move.

As that drama played out (markets quickly recovered), he learned that when a financial crisis lands on the front page, there’s a lot of information but not much enlightenment.

The quality of information in that immediate moment is poor because the event, by definition, is a bolt from the blue. Nobody has an immediate ability to make sense of it. Experts are winging it just like the rest of us, he noted.

The worst day of this past winter might have been Jan. 19, when the dollar hit 68.69 cents (U.S.). Commodities, the market and our sense of well-being had been dropping steadily for about six months. Many were afraid there was a recession around the corner.

That was the time of the infamous predictions of a 55-cent dollar and $10-a-barrel oil. Not to mention the Royal Bank of Scotland’s hysterical “Sell everything ahead of the crash” advice.

Your response at these times, Bradley says, should be to do nothing at all. When emotions are high and everyone is guessing, sit tight. Big shifts in strategy at times of crisis lead to bad decisions, he says. People like my friend’s father, who sell at the bottom, needlessly destroy their savings.

Even so, crises are a good time to take stock. These events are an opportunity to see whether your plan needs changing. But any changes should be gradual, Bradley says, since market extremes aren’t the time for radical steps. Better to move slowly and get it right than react all at once and get it wrong.

Elsewhere in the first book, Bradley quotes the New York-based economist Peter Bernstein, who said that “in calmer moments, investors recognize their inability to know what the future holds. In moments of extreme panic or enthusiasm, they become remarkably bold in their predictions.”

It takes a lot of effort to succeed as an investor. One rule is to stick to your guns. It’s just one of the insights found in Bradley’s books, which are well worth a little time spent reading. Adam Mayers writes about investing and personal finance on Tuesdays and Thursdays. Reach him at amayers@thestar.ca