As a pilot in the US Air Force I went twice a year into the flight simulator … didn’t do stuff we already knew … we went over stuff we rarely, if ever, see ….. Emergency Procedures!
The roots to panic are not knowing what to do. And sometimes instinct is wrong (Pilot example: they should push down even though instinct is to pull up)! In our profession, instinct is to change the allocation. That doesn’t change anything for retirees … so how can it help the not-yet-retired too?
The Costa Concordia’s cruise ship accident demonstrates unpreparedness and a normal-routine bias in spades. What are the emergency procedures? What do I do? You can’t jump out of a commercial airliner at 30,000 feet … retirees can’t leave the markets and survive in the long run.
There are processes that help put you in a “portfolio simulator” (your thoughts and actions) so you can see and learn ahead of time how to behave and what to do when scary situations come along.
The primary and most important simulation is to be very honest with yourself when considering risk assessment questions! Why? Because trying to change the allocation later when markets have gone down really doesn’t solve anything other than to brutally remind you that you are more afraid than you cared to admit. Market timing doesn’t really work for investors, which is demonstrated by Dalbar studies (Quantitative Analysis of Investor Behavior (QAIB) each year since 1994), since this is essentially experiencing a greater risk of loss (more aggressive allocation) and then switching (to a less aggressive allocation) so as not to experience the possible gains of the earlier allocation should markets recover.
Process is important:
In the end, we are all part of, and depend on, the economy. There is no method to extract yourself from the economy, or the effects of the economy (without going to extremes … and even then oftentimes there is still some dependence). Having a process and mindset that recognizes this is the first step to address less than ideal situations.
Moral of the story: Waiting for something to happen and then panic about it is not planning. The purpose of simulator training is to become comfortable with the emergency, so should it happen, a rational thought through and practiced process kicks in.
PS. This program on Nova, Why Ships Sink, discussed “Behavioral Inaction” as a response to emergency. This is the opposite of behavioral action that really is self defeating. A thought out process in place ahead of time helps lead people through the event. Behavioral Inaction may be helped through communication and leadership through a process.