ON APRIL 14, 1988, Captain Paul Rinn was the commanding officer of the USS Samuel B. Roberts when it struck a mine in the Persian Gulf. The resulting explosion tore a 21-foot hole in the side of the frigate. Almost immediately, the ship began taking on water and multiple fires broke out.
Naval protocol for this situation was clear: Put out the fires first, then worry about patching the hull. But after just a few minutes of firefighting, Rinn realized he would need to ignore protocol or the ship would sink before the fires were out. He immediately directed the crew to begin patching the hull with any available materials, including clothing and bed sheets. Thanks to Rinn’s judgment, the ship was saved and no lives were lost.
Some 20 years later, while flying out of New York’s LaGuardia Airport, Captain Chesley Sullenberger faced a similar situation when his plane lost power in both engines. While a later analysis indicated that Sullenberger could have made it back to the airport, he understood the danger of attempting a landing in such a densely populated area, so he opted for a seemingly risky water landing on the Hudson River. As you probably recall, the plane landed safely and, again, no lives were lost.
The dangers of making decisions under stress are well understood, which is why Rinn and Sullenberger are both lauded as heroes. In both cases, there was no ready playbook. Instead, they combined equal doses of skill, judgment and intuition to make the miraculous possible.
What can ordinary people learn from them? I hesitate to compare financial decision-making to the life-and-death choices faced by these two men. But it’s worth exploring ways we can also combine logic and intuition to manage the financial stress that many of us feel today.
While there’s no magic bullet, I recommend starting with an awareness of what stress does to us. You’ll then be in a better position to use stress to your advantage, rather than letting it control you. Below are three aspects of stress that have a bearing on financial decision-making:
1. Information. A key characteristic of any stressful situation: Information is incomplete, inaccurate or simply unavailable. That’s absolutely the case today. The health impact of the coronavirus is still an open question. Beyond that, we don’t know what the result will be for financial markets.
Unfortunately, that doesn’t stop people from offering their own theories, opinions, anecdotes and predictions. Today, even some people with seeming expertise are employing alarmist language. On Friday, for example, the Managing Director of the International Monetary Fund called this “humanity’s darkest hour.”
How can you turn this to your advantage? Think in terms of half steps. If you’re considering actions such as reducing your portfolio’s risk level, taking more risk, rebalancing, making gifts for estate planning purposes or completing a Roth conversion, don’t jump in with both feet. Instead, take a partial step. That will give you the peace of mind that comes with knowing you’ve taken some action, while still leaving your options open for later, when you’ll have more and better information.
In addition, I’d be careful not to let others tell you how to think or feel. If you’re hearing people use phrases like “Armageddon” or “humanity’s darkest hour,” take a step back, sharpen your pencil and simply evaluate how the current situation is impacting you. Everyone is in a different position, so you shouldn’t let other people’s views or emotions influence your decisions.
2. Time. If you’ve ever taken a standardized test, you know that limited time also induces stress. Since financial markets move quickly, and no one knows whether the next move will be up or down, you may feel the urgency to take action.
How can you turn this to your advantage? My advice: Slow down. Make a plan. You don’t know what will happen, but it’s fairly easy to imagine the full range of scenarios. Even if it’s just for your own benefit, write down what you’ll do in each scenario. That way, if the stock market rises 20%, or it falls 20%, or your pay is cut, or any other scenario develops, you’ll have a plan. This, in my view, is the best way to combat time urgency.
3. Focus. Psychologists have found that the human mind tends to narrow its focus when stress levels increase. This makes sense. When the fight-or-flight instinct kicks in, our minds focus only on the danger at hand. In many ways, this is a good thing. In academic experiments, researchers have found that stress-induced focus sometimes helps people make better decisions. We focus on what really matters and worry less about the details.
But there’s a downside. Research has also found that, at times of stress, people fail to consider the full range of potential solutions. It’s quicker and easier to take some action—any action—than it is to sit down and research alternatives. But this isn’t optimal.
How can you turn this to your advantage? Again, sharpen your pencil. Use focus to your advantage by translating the financial stress you feel into specific questions. Then, as you search for answers, do everything you can to widen your field of view. Read widely. Consult with friends, family members, colleagues—whoever you trust. Try to gather a range of ideas and opinions. While every financial crisis is different, the toolbox of solutions doesn’t change a whole lot. Make sure you consider all options before taking action.
This is especially important in today’s situation. Isolation is working against us. Irrational fears build on themselves if we don’t have an opportunity to talk them through. So now, more than ever, be sure to stay in touch with others.
Adam M. Grossman’s previous articles include Unpleasant Surprise, Keeping Busy and Harder Than It Looks. Adam is the founder of Mayport Wealth Management, a fixed-fee financial planning firm in Boston. He’s an advocate of evidence-based investing and is on a mission to lower the cost of investment advice for consumers. Follow Adam on Twitter @AdamMGrossman.