A stock market collapse will teach you a lot about your psychology

The last stock market collapse happened back in 2008, which feels like centuries ago to a millennial. I was working with my brother back then and it was a scary day.

When the market took a nosedive, customers that had placed orders with our business began ringing our office landline constantly. In a day, we lost most of our orders and had to let people go as a result. It was a day I’d never forget and it felt like the beginning of the end.

The stock market recovered slowly, though, and so did our business. Within a year, everything was back to normal and we were able to hire staff again. Twelve years on, the world is long overdue for a stock market collapse. The doomsayers have come out from their bunkers and are calling it the end of the financial system.

Anyone who predicted an inevitable collapse is now seen as a future male/female version of Warren Buffett without the grey hair.

The stock market has collapsed. It’s the worst since the last collapse in 2008. Living through my second stock market collapse, I’m learning a lot about psychology and the lessons will be useful to you (this is not financial advice).

You think this time is different

The easiest way to explain a stock market collapse in your mind is to believe that this time is different. Writer, Ben Carlson, summarises this point beautifully:

This time is always different in terms of the current state of the markets because they’re complex and adaptable. But it’s never different when it comes to our inherent behavioral biases.

You could blame a virus or a rogue government for the stock market collapse. You could say central bankers have gone crazy, but these factors have always existed. The market always drops for the same reason:

  1. Greed
  2. The cyclical and repeatable behavior of stock markets

This time is not different; it’s the same. Markets will fall and that’s why it’s important to understand your own psychology when it does. Otherwise, you’ll be rushing to the exits and selling all your investments, thus locking in your losses.

You will be tempted to sell

No matter how bulletproof your mind is, you will be tempted to sell when the markets are losing big. You will think it’s the only way. You’ll watch everyone around you panicking and it’s natural that you’d want to mimic their behavior.

What has helped me during this recent stock market collapse is to remember why I bought stocks in the first place. I made an agreement with myself that investing is a long-term game and therefore, what happens in the short-term is not important.

If you believe in capitalism, then you have to back yourself when it all goes down. Markets always recover again and you have to remember that.

It will be scary

When the stock market collapses, it’s scary. People lose their homes and their jobs. You can feel that you might be next. Your safety net can feel like it has disappeared. Face these thoughts head-on. Admit what is happening but don’t let it consume you. You’ll be okay. You’ll find a way.

The news will lie to you

Watching mainstream news is a terrible idea when the stock market crashes. They will feed your fear in return for your attention. They will speculate until the cows come home and go down rabbit holes that are not real.

They will have “financial experts” come on their talk shows and try to explain it. They will make wild predictions and try to get you to agree with them.

Don’t do it. The news is a business and it doesn’t help you deal with your mindset when your money — that represents your time spent at work — is on the line.

The illusion of safe havens

No investment is safe during a stock market collapse, even though leading up to one, we’re led to believe there is. All asset classes are down, some more than others. You can’t really protect yourself but you can shelter yourself from the storm by thinking clearly or even taking a break from it all.

Buying gold won’t save you from the stock market collapse; your psychology will and that’s in your control.

Rumors of another great depression

The Great Depression started in 1929 and lasted for ten years. During that time, people like my grandma did it tough.

Consumerism wasn’t a thing so they just learned to live off the land and treat their neighbors well. It was a financial depression, yes. But it was a great time to be alive because they were forced to be kind to each other and help one another out.

Every time there is a stock market crash, the Youtube financial experts living off the addictive drug of ‘advertisements’ tell you another Great Depression is coming. The same happened during the 2008 collapse. It’s not impossible for it to happen again but it is highly unlikely.

You look to take on more risk

When your investment returns are bone dry, you look to take on more risk. The desire to invest in relatively new digital assets becomes a temptation.

Taking on risk when there is a stock market collapse is a bad idea. You won’t be thinking straight and any excess money you have can be insurance against any more financially devastating events.

One solution I have found is to sit this one out. If you don’t know what to do, do nothing and watch the show. Grab a bag of popcorn and a beanbag if you want to.

You check your stats a lot

I have found myself checking the stock market a lot. Instead of writing and making a living, I’ve been caught up in the madness during each of the last seven days. You can’t increase your net-worth back to where it was by looking at the single pane of glass that is your phone and hoping.

Protect your psychology and consider putting your phone away. This strategy works for stress and doing focused work too.

You forget easily

Only a few months back I was buying stocks like they were going to run out and I’d be broke if I didn’t.

When the sentiment of the markets is high, your greed sets in and you think you know everything. Warren Buffet, one of the richest people in the world, has a great quote: Be fearful when others are greedy and greedy when others are fearful.

It’s amazing how quickly you can forget that when the market is roaring and you’re making a killing from your laptop thinking you’re god.

Talk to people who have lived through more than three

I found this strategy really helpful: Talk to people who were there when the US Dollar was taken off the gold standard. Talk to people who were there for Black Monday in 1987. Talk to people who were there for the tech bubble of the early 2000s. I have done that over the last few days.

What you learn from people who have lived through several stock market crashes is that it’s best to remain calm. Don’t make crazy decisions or get caught up in it all. People who have been there several times have this quiet solace about the situation that I find addictive.

They’re likewise financial Yoda’s sitting in their swamp and waiting for a young Luke Skywalker to impart their wisdom on. Find these people for yourself. They are everywhere.

The Opportunity of the Decade

There is a psychological reframe you can use during a stock market collapse. Are you ready? Here we go.

When the stock market collapses, it’s a once in a decade long opportunity to buy your chosen investments at a discount. It’s bargain season.

There are two strategies I have learned about the stock market collapsing and human psychology:

  1. You can sit on the sidelines and remain calm
  2. You can see the situation as an opportunity

Whichever way you feel inclined, your psychology will guide you.

Final Thought

The stock market collapsing is a great time to look at your psychology. It will teach you so much about yourself and how you deal with both greed and fear.

When the stock market collapses, you will think this time is different, you will be tempted to sell, it will be scary, the news will lie to you, the illusions of safe havens will exist, rumors of another Great Depression will surface, you will unintentionally look to take on more risk, you will check asset prices a lot, and you will forget the last recession easily.

Talk to people who have lived through a stock market bubble and economic collapses for perspective. Manage your psychology and you will do well out of the situation and learn a helluva lot.

This article first appeared on Medium.