The Independent Market Observer

How to Remain Calm (and Carry On)

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Sep 25, 2020 2:51:44 PM

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remain calmIn a client event this week, I got an interesting question: “How do you stay calm? With everything that is going on, with all of the problems and risks that you have to evaluate, every day, how do you manage to stay calm?” I thought it was a very good question.

Indeed, my job is to look at what could go right—and wrong—and help investors take advantage of the good and avoid the bad. During the good times, I think about what might go wrong; during the bad times, well, I think about what is going wrong. I am good at it (they don’t call me Eeyore for nothing). But how do you stay levelheaded if you spend all day thinking about what can go wrong?

Replace Worrying with Planning

The question is especially timely now, of course, as we are collectively all doing the same thing. Doomscrolling, a term I found online, is when you obsessively look through the headlines for more bad news. You can easily drive yourself crazy with everything that is going wrong now and much more so with what might go wrong. How do we stay sane, much less levelheaded, in this environment? For me, the key is to replace worrying with planning.

Worrying about something implies a lack of control around an event. You may indeed not be able to control the event, but you can control your reaction. Planning means taking control of that reaction. But what do you need to be able to plan?

Understand What Matters and Why

The first is understanding what matters and why. From an economic point of view, what matters are jobs, confidence, and interest rates. Ignore the headlines and pay attention to those. That is why I do the monthly Economic Risk Factor Update. I don’t have to worry, because I know what matters. This knowledge has substantially reduced my own worry levels around the economy. The economy will do what it will do. But based on proven metrics, I will have enough lead time to prepare and plan.

This tactic also applies to the markets. We watch valuations, interest rates, fundamentals, and technical factors. Again, if you have an understanding of what matters and why, you can game out a range of likely outcomes—and plan for them. Both the economy and markets are rational systems, ones that can be understood. We are not flying blind here, which is a good thing because that would be worrying!

Know Your Time Horizon

Even rational systems can have breakdowns, though, and act irrationally at times. So, the second component of staying calm is knowing your time horizon. If you understand how the system works, and over what time frames, any shorter-term fluctuations are easier to weather. Any investor has an implicit time horizon. If you are saving to send your child to college, that is most likely when he or she turns 18. If it is for retirement, that is when you turn 65. And so on.

When you know your target date and you know how long volatility lasts, you can stop worrying as long as your time horizon is well beyond the volatility. And if it isn’t? You can plan and take action.

Let’s take an example: fears about turmoil and even violence around the election this November. To understand how the system works, we can look at what happens in a disputed election and find that we will have an answer on Inauguration Day. Then, we can look at where future returns come from (i.e., growth of the U.S. economy) and recognize that, over time, the election will have no real effect. Am I worried about the election? As a citizen, yes. As an investor, given the above and looking at my time horizons, no.

I do the same with the markets (e.g., with the drop in March and the recent turbulence) and the economy (e.g., around the recent coronavirus recession). By analyzing, understanding, and putting that in context with my time horizons, I often find there is nothing to worry about. And if there is, that same analysis lets me take the appropriate action.

Ease Your Mind

That is really my job: not to worry but to identify risks (which sounds similar, but is very different) and then to take action. Worrying disturbs your peace of mind and is bad for you. Analyzing and taking control can ease your mind—and are good for both you and your portfolio.

And that is how I remain calm (and carry on).

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