Another day, another alarming financial headline!
Back in May, when crypto took a nosedive, I recorded a special episode of the podcast looking at how to behave before, during and after a crisis to stand the best chance of coming out the other side, if not totally unscathed then at least in one piece.
When it comes to crypto a lot of people were experiencing a financial meltdown for the first time; as I said in the episode it’s something I’ve experienced before, because sadly history likes to repeat itself!
In any situation, it’s easy to get caught up in what you’re doing and not recognise the risks until it’s too late: if everything has been going great, when things suddenly start getting hairy it’s easy to freeze, without any clue of what to do next.
Here are my top tips on the best behaviour before, during and after a crisis:
1. Be aware of your biases
There are usually two biases at play, and it’s really important to make sure you’re aware of them.
Confirmation bias is when you’re searching for positive signs to confirm that whatever decision you’ve made is the right one. You reject anything that goes against what you want to hear.
If you get upset by someone telling you that X or Y investment is risky, there’s a chance that you’re suffering from confirmation bias, which you may not recognise. That’s the big issue here – by not recognising it and being so blinkered that you get burned in the long run.
Continuity bias is a tendency to downplay risks and throw caution to the wind, and assuming things will stay as they are. There was a pattern with crypto, people were advised to ‘buy the dip’ – to buy more during any drop, because the market would always bounce back.
When that strategy is working, great – but you must remember that this never works forever. Business models change. Habits change. Markets change.
At some point, what you’ve been doing consistently for the last few years will suddenly stop working. You may not initially recognise this, thinking it’s another ‘buy the dip’ opportunity, but what if that strategy is no longer working and you’re just buying something that’s going to continue to fall?
Be very careful.
2. Focus on what you can control
When a friend came to me earlier in the year facing a potentially career-ending crisis, the advice I gave him was to focus on what he could control, rather than fretting about what he couldn’t. That’s advice I’ve given to myself over the years (although earlier on in my career that wasn’t always the case, I must admit!)
In life, we have three circles of influence.
- The inner circle. This is you. You’re in total control of everything going on: your emotions and your behaviour. This is where your focus needs to be.
- The outer circle. Friends and family. You’re not in full control here (they may reject your views), but you do have reasonable influence over what’s going on.
- The great beyond. Peers/society. You have ZERO control over anyone’s thoughts and opinions here. You might initially be able to influence people by employing some good PR and putting a positive spin on things, but you can lose control of that very quickly, so it’s pointless spending time and energy worrying about it.
Focus on what you can control in your own life, and don’t worry about the rest.
3. Remember the 5 deadly D’s of a Crisis
First comes the Drama – whatever the crisis is, it’s happened. It might be a fire in your home, a car crash, a collapse of the markets – anything that puts you at risk.
All too often the immediate response is Denial, because you don’t want to accept what is happening or what the long-term consequences might be.
If you’re sitting with your fingers in your ears, saying ‘everything will be fine!’, this results in Delay and rather than immediately dealing with the situation, you put off doing anything.
Fast forward to Deliberation. You finally realise that you’ve made a mistake and really need to take action – seeing other people reacting makes you realise that you need to make your move.
Only then do you make the Decision and finally act but all too often it is now too late, and you’re left with a 6th D: Damage!
4. Don’t put all your eggs in one basket
Investment is all about diversification and keeping an open mind. One of the biggest mistakes you can make (especially when you’re dealing with a volatile market) is to put all your eggs in one basket.
Diversification means spreading those eggs around and in doing so, spreading your risk. If any one market collapses, it only represents a segment of your portfolio, rather than the whole thing.
You might invest in cash, crypto, stocks and shares, property, you might even put money into a business. Whatever it is, means you end up with a portfolio that is more stable.
The problem is that diversification steady and predictable, which some people find quite boring. You need to remain disciplined and do not compare yourself with others – such as your mate who is up 50k because he put everything on Bitcoin. This often results in you following suit only to suffer the dramatic fall later.
Everyone loves it when their stock rises 25% in a day… but remember with volatile stocks you can suffer the same percentage decrease in the same space of time. Nothing pays with your mindset like watching your portfolio nosedive 70% in a month – when it comes to investing, boring is good.
5. Keep your emotions in check
Don’t get emotional when you have volatile dips and rises, and don’t get sucked in when other people appear to be winning (when you’re not).
You can’t afford to get dragged in. Some time ago a friend of mine was doing really well in stocks and shares, telling me he was up £40k. Like a flash, I was in the market, trying to replicate his gains. Don’t react to other peoples’ wins: for all you know, you’re being sold an Instagram-perfect version of events rather than what’s actually going on.
The other thing about behaving emotionally is that it will make you do stupid things. If there’s a crash, stop fantasising that you’re going to make your money back – you wont and you are being delusional. This is such a common mistake – you were reckless and now you’re paying the price.
A cautionary tale to remember here is Nick Leeson. Back in the 90s he singlehandedly brought down Barings Bank. He lost $1.4 billion and folded the entire bank – he kept doubling down, thinking he could recoup his losses on the next trade, it was a strategy that sent him straight to jail.
6. It was never yours to begin with
People fixate on wealth and how much their portfolio is worth. It hits a peak, and from then on you’re always going use that as a benchmark.
Back in 2007 I remember my portfolio being valued at €65m. Every day after that, when it started to fall, I just kept remembering that figure. If I’d sold everything at that level, perhaps I could have locked in that profit, but in reality it was only ever a temporary valuation that lasted a couple of months. The market was overpriced and in actual fact the ‘real’ figure was probably substantially lower.
The sooner you realise that the higher figure isn’t necessarily accurate, and more importantly, temporary, the better. It can be painful, but it’s important to stay grounded and remember the figures you’re seeing on paper are never realistically going to end up in your pocket.
7. Plan for a rainy day
Scenario planning is vital in protecting yourself: you need a base case and a pessimistic case.
As we saw with the pandemic, unanticipated global events can appear out of nowhere to throw everything into chaos. If you always have a worst-case scenario in your back pocket and always assume that something unexpected could occur at any time, then there’s a greater chance that you’ll be prepared and make it out the other side if and when things go wrong.
8. Take ownership
This can be hard to swallow, but you must take total ownership for whatever you’re going through.
Own your stuff and stop blaming other people. Yes, there may be other factors at play, perhaps other people acting against you, but the reality is that whatever situation you’re in, you’re the one who put yourself there and once you accept that, only then can you really deal with it.
In my opinion, you can only really get yourself out of a problem when you accept responsibility for it, own it and accept that blaming others makes you a victim. Be the warrior, not the victim.
I know that when the market is moving against you and you feel your back is against the wall these tips may feel a little gloomy and pessimistic, but take it from someone who’s been there, done that and got the t-shirt, they won’t steer you wrong!