What Investors Can Learn in Global Disasters

BOSTON (TheStreet) -- This weekend marks the three-month anniversary of earthquakes that ravaged Japan.

The disaster has long fallen from the front page of America's newspapers and top-of-the-hour broadcasts. It is not surprising that the tragic events have ceased to be top-of-mind -- American media (and consumers of it) have a notorious habit of leaping out of global coverage as quickly as they are to pile in. But there is another reason why we may not be talking much about Japan these days: the lack of drama.

Things are still in crisis mode in Japan since a massive March 11 earthquake, but the nation's stoic, get-back-to-work approach has made its recovery matter-of-fact. Americans may have something to learn from Japan's reaction.

What can Americans learn from how Japan went about life in the aftermath of the tragedy? There are a few obvious lessons, one being that nuclear power plants need to be as "earthquake proof" as possible.

Other natural disasters yield additional takeaways. A Senate hearing in September was devoted to "What the United States can Learn from the 2010 Chilean and Haitian Earthquakes."

In January of that year a 7.0 magnitude earthquake struck Haiti, a country described by Sen. Mark Pryor, D-Ark., as "a very poor country with very primitive building codes and minimal response capacity." More than 230,000 people died in the disaster and another 300,000 were injured.

The following month in Chile, an 8.8 magnitude earthquake led to tsunami warnings in 53 countries (including the United States). Despite the scale, only 521 victims were killed, with testimony giving credit to the precautions and emergency plans put in place by that government.

At the Congressional hearing, experts weighed in on such topics as evacuation plans, the need for strengthened building codes and the logistics of mass shelter.

"Our goal is to make an American response look more like the results of the 2010 Chilean Earthquake and less like those of the 2010 Haitian earthquake," Pryor said. "Many Americans may be tempted to think that the U.S. could never suffer an impact like that experienced in Haiti because of our many resources ... but I ask you to remember the days following Hurricane Katrina and think again."

An alarming focus of the hearing, underscoring the need to learn from disasters abroad, is the New Madrid fault, which includes Arkansas, Mississippi, Tennessee Missouri, Kentucky, Illinois and Indiana. One hundred years ago, a quake along that fault caused damage up to 1,000 miles away. Today, the region is home to 43 million people, and a similarly sized quake would lead to more than $300 billion in direct economic losses.

The U.S. could gain insight into pressing economic problems by learning from political upheaval around the world.

Last winter, rioting rocked the streets of Greece during a nationwide strike sparked by austerity measures that looked to cut the salary and pensions of government workers. These and other moves were sparked by the need to tackle a massive national deficit that forced leaders to go hat in hand to the European Union for a bailout.

Similarities between developments in that nation and here in the United States are far from coincidental: a massive deficit, unpopular budget cuts, an attack on pensions (i.e., Social Security) and 9% unemployment kept from being even higher by not much more than government spending. Even the bailout sought from other countries compares to our own reliance on Chinese investors.

In France, rioting erupted over what might seem a rather trivial effort to raise the retirement age for collecting a pension to 62 from 60. In the U.S. -- with workers facing the loss of traditional pensions, inadequate personal savings, the prospect of working past 70 and debate over the future solvency of Social Security and Medicare -- that public boiling point is a warning officials should heed.

The bigger lessons are less tangible.

Things are still in crisis mode in Japan, but the nation's stoic, get-back-to-work approach has made its recovery matter-of-fact. While buildings crumbled, society pulled together, just as it did after the 1995 Kobe earthquake. There was no looting and no riots. People just got on with their lives, separating emotion from the task at hand.

That stoicism might be applied, on a more personal scale, by U.S. investors who tend to make bad moves based on fear and uncertainty arising from domestic and foreign crises.

Separate emotion from financial decisions, says Michael Tucci, president and co-founder of Lexington Wealth Management, a Massachusetts wealth management and investment consulting firm.

"Emotions are a part of life ... sometimes more so, sometimes less. Sometimes people you think are less emotional are actually more emotional," Tucci says.

The key, he says, is to develop a plan and strategy when relative calm is the norm, then stick with it even as the world seems to be crashing down around you. An income plan can be frequently revisited, but the changes shouldn't be reactionary or dramatic.

"We've seen a whole bunch of horrible things that have happened in the past decade, at least from an investment perspective, from 9/11 to the tech crash to the Great Recession," Tucci says. "At the end of the day there are studies out there that show how people who overreact end up being far worse off than those who put in a strategic plan and make some minor tactical moves along the way."

In a white paper titled "The Road to Financial Success: Balancing the Head and Heart of Financial Decision Making," Tucci and Glenn Frank, director of tax investment strategy for Lexington Wealth Management, make their case.

"Legendary tennis star Jimmy Connors put it best: He hated to lose more than he loved to win," they write. "The loss aversion routinely manifests in situations that see the heart overrule the head, leading investors to make unwise moves."

"Investors are only human, and humans are often irrational creatures," they add later.

That view led Lexington to take the unusual move, at least in financial circles, of bringing in a psychologist on retainer who works with clients as they try to separate emotion from prudent financial strategy.

"Shortly after 9/11 hit, they called to ask me for some advice about how they could best serve their clients during that tough time," says Szifra Birke, a licensed therapist who works for the firm as a wealth counselor. "I advised them to contact each client -- not to talk about money and portfolios, but to just touch base and see how people were doing. If the client brought up money or portfolios, fine, but their real job was to just be there as trusted advisers."

Birke was pleased to see that most clients appreciated the perspective she brought to the table.

"I don't do therapy with these clients," she explains. "The way I am introduced is just simply as another member of the firm. It is not like they are sending somebody off to the shrink. I think people are in general very comfortable with the idea that I have this background to draw from, and my style tends to be very practical."

Birke says "emotions hijack our thinking."

"There is a part of our brain that, in times of stress or anxiety, really goes back into primitive mode," she says. "The brain is under threat and reacts as though the sabertoothed tiger is chasing us."

"It can be as monumental as 9/11, it can be as minor as gas prices go up," she adds. "I had a client with $6 million in assets who, when gas prices went up, dragged out his spreadsheet and started doing the numbers all over again, making sure he had enough to live on, even though logically of course he would."

Simply put, introducing a "human element" to the equation calms this over-activity, and allows rational thinking to kick back in, she says.

-- Written by Joe Mont in Boston.

>To contact the writer of this article, click here: Joe Mont.

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