How to stay calm while others panic

Dr Richard Peterson says you shouldn't make hasty decisions during a crisis.

As an associate editor at The Journal of Behavioural Finance and one of the founders of MarketPsych, a US consulting firm that helps calm the frayed nerves of investors and traders everywhere, Richard Peterson knows a thing or two about what happens when tensions run high in the markets. In his book Inside the Investor's Brain, published last year by Wiley, he undertook an in-depth analysis of the ways in which fear, anxiety, doubt and other emotions drive us to irrational - and often ill-advised - investing decisions. If you are feeling fearful about your stock portfolio - and who isn't these days? - relax, breathe deeply and take a look at Dr Peterson's seven tips for staying sane:

Externalisation - "See the fear around you so that you can distance yourself from your own fear," Dr Peterson says. The more informed you are about the fear that is shaking the financial system to its core, in other words, the better you'll be able to cope with your own, inevitably less significant fear. Reframing - Instead of thinking about fear in a panicky way and fretting over your portfolio's steep decline in the past couple of months, see it as an opportunity to buy stocks cheaply. The legendary investor Warren Buffett famously said we should be fearful when others are greedy and greedy when others are fearful. Now is a time for greed.

Don't panic - Panic is even worse than fear. It's an in-the-moment crisis state that can lead to some seriously ill-considered investing decisions. Even if you are gripped with fear, take time - a day, say - to cool off before making any serious moves. "Changing perspective to a long-term view can be very helpful," Dr Peterson says. "For example, deliberately think of how happy you are in your life, family and overall finances before panicking about one small position in the markets."

Diversify - Make sure your money is not concentrated in one region, one sector or one asset class. Times are bad for banks in the US, which is why it is no good for your psyche to hold a banking stock-only portfolio. The more diverse your holdings, the better you will weather financial storms like the one in progress - some of your assets will fall in value, but others will gain. Compare - If you look at the dismal performance of some of the leading indexes, you might find you are doing better than you thought (type INDU into the search field at a markets website like finance.yahoo.com to get recent figures for the Dow Jones Industrial Average). "If you are a long-term investor having trouble holding tight, look at how you are performing relative to the worst sectors and funds in the market," Dr Peterson says. "It could always be worse." ? De-inform yourself - A lot of investor stress stems from a case of TMI (too much information) about the markets. The doctor advises paring down your "information consumption" to three newspapers or news feeds per day, thus reducing confusion and keeping you serene.

Exercise - Run on a treadmill, do tai chi, get into a meditative trance or go to the gym for some power yoga. Being active helps take the lead out and notches down your stress levels. "You are demonstrating to your body and your mind that you can control and work through physiological stress," says Dr Peterson. [e-mail]