While the full impact of the COVID-19 pandemic is unclear (and likely will be for some time), public crises inevitably have a dramatic impact on financial markets. A look at past crises makes that clear, with widespread economic disruption and uncertainty leading to nervous investors and plunging markets. So, while the current market disruption may be historic, the underlying dynamics of market volatility are extremely familiar.

For better or for worse, market volatility is a fact of life. Understanding that volatility — what drives it, how financial professionals typically react to it, and what should and shouldn’t happen as a result of a crisis — is essential for anyone looking to navigate the current crisis and position themselves for long-term success.

We can learn from the past, provided we take the time to look.

HISTORY AND PSYCHOLOGY

Big events that drive market disruption stretch all the way back to the Great Depression in the 1930s, and include national disasters, political upheavals, recessions and major economic downturns, geopolitical unrest, energy market disruptions, and even health scares. What every crisis has in common is a tendency toward investor overreaction and emotional decision making. It’s human nature to think the good times will keep going, and it’s human nature to do a U-turn when circumstances change.

We tend to think of market indices as made up of dollars and cents, but we are reminded in times of trouble and turbulence that they are fundamentally human commodities. In other words, markets trade in confidence — or the lack of it. Understanding the common psychological pitfalls that have led investors astray in the past is just as important as knowing what assets to buy and sell and what investment strategies to pursue.

OBSTACLES AND OPPORTUNITIES

Warren Buffet once noted that most investment decisions are made based on two things: fear and greed. He also pointed out (correctly) trying to “be fearful when others are greedy and to be greedy only when others are fearful” is a formula for smart investing.

In simpler terms, don’t follow the herd. That can be tough to do in a crisis. The fear of losing, or even being perceived as losing, can be a powerful motivator. The urge to want to be a part of shared successes can overcome a lot of good decision-making. It’s also exactly the wrong impulse to follow in a crisis. There’s a reason why reluctant sellers, and early buyers, during the recession of the late 2000s saw rates of return more than double those who hesitated to buy back into the market.

The key to overcoming those self-destructive impulses is discipline. Savvy investors and experienced financial professionals understand that discipline requires a plan, and the ability to execute that plan. Even an imperfect plan is likely to be better than no plan at all. However, past crises — and those who have come through them the best — have shown time and again that sticking to a plan doesn’t mean being rigid. It means having an approach and a mindset that will ensure you are prepared and committed to make decisions the right way, and for the right reasons.

LEARN FROM THE BEST

The most valuable lessons we can learn from past crises come from those who were surfing those turbulent waters: financial professionals. What do the best financial professionals have in common? What do they do differently in times of crisis? How do they talk to their clients? What decisions are they making? And, perhaps more importantly, why are they making those decisions?

A look back at past crises reveals that the financial professionals who did best during those times were:

Disciplined: The best advisers know not to hold onto something just because you don’t want to take a loss on it. They avoid the sunk cost fallacy and evaluate positions daily, asking themselves the question: “Would I buy more of this today?” If the answer is “no,” they move on. They recognize that operating in a crisis is not about maximum return, but protection of assets (hitting singles and doubles instead of a home run). They are knowledgeable about asset categories such as alternatives, precious metals and real estate investments that can help weather the storm of a crisis and serve as hedges against liquid assets, a source of durable income, and/or an attractive investment opportunity.

Honest: The best advisers understand how to set expectations. That starts at the very beginning of client relationships, preparing those clients for the inevitable — that bad things will happen. It’s not a matter of if, but when. Don’t just focus on the positive. They communicate with transparency, clarity, and even vulnerability, and they show a willingness to have tough conversations before tough times hit.

Counselors: Successful advisers are true counselors, talking to their clients not only about their portfolio (in specific and direct terms about risks and results), but also about how different outcomes will feel to their clients. They are skilled at translating big events into a more personal level, putting macroscopic forces into a relatable context.

Observers and anticipators: The stock market is a leading indicator of what’s next, the collective canary in our shared coal mine. It reflects everything from monetary policy to consumer sentiment. But great advisers pay close attention to subtle indicators within the market and recognize the signs that have foretold past crises, such as employment numbers and trends, a yield-curve inversion, and the tone of the Federal Reserve.

Teachers and students: The best are both educators and students. They are flexible and open-minded, willing and eager to hear about new products and new strategies, constantly striving to evolve and improve and make better use of the diversity of products and possibilities available to them.

STEADY AS SHE GOES

The last lesson to be learned from past crises is that they pass. The resilience of capitalism and the spirit of innovation and entrepreneurial energy will ultimately prevail. An energy crisis might lead to a surge in alternative energy solutions and better battery technologies. Today, in the midst of a pandemic, businesses around the world have adapted to a completely new work paradigm — working from home and leveraging new tools and technology to maintain, and even enhance, productivity.

In dark times, the future is always bright, which is why, in a crisis, great advisers are like pilots, working to reassure their passengers while reminding them they need to put their seatbelts on to prepare for some turbulence. It’s a bumpy ride, but we will get there.

Drew Jackson (djackson@concordeis.com) is president of Concorde Asset Management.