Three possible reactions to a stock market crash

Let's set the scene! After weeks and months or years of almost constant growth, the stock market does something that takes many new investors by surprise — the market falls by about 5%, 10%, or even more. The impact is exaggerated by the media, and everyone is in panic mode. How an investor reacts to the market's decline says a lot about who she is as an investor. In this blog post, we review three possible reactions to a stock market decline. Once you are done reading, sit back for a second and figure out which of the three possible reactions is the way you have responded to the COVID-19?

The Blissful

If this blog post is the first time you are thinking about how to deal with a stock market crash, the chances are that you fall in the Blissful category. Let me tone it a bit down because unless you live under the rock, there is no way you've missed the financial media, Twitter, Facebook, LinkedIn and other social media's trumpet of doom. Even if you knew about it, if you didn't open your brokerage account or the application where you monitor your investments to see what's going on or read at least 2-3 articles per hour from sources you trust to understand what's going on, you are definitely a blissful investor.

Now what? Being blissful is not necessarily a bad thing. What to do next depends on your current investment status. If you are already an investor and you have a recurring or an ongoing process for investing, and when you heard about the stock market's decline, you shrugged the news off and said to yourself, "Meh, who cares, I'm in it for the long-term, my automatic investment will go through as scheduled. Let's move on!" You are a good kind of a blissful investor. Congrats! May you prosper in your blissful ways of living! 
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On the other hand, if you shrugged it off because you don't have the habit of keeping yourself informed and you don't have a natural curiosity to learn about the stock market, you are most likely missing a lot. Your kind of blissfulness may help you slide through life like Buddha, but don't expect to generate wealth, or retire early, or have the money required to fund a side-hustle. If any of those things are among your goals, you are not on the right track! Start learning about how to invest for the long-term.

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The Maniac

Did you login to your brokerage account or the application where you monitor your investments at least once a day? Did you read several articles, jumping between articles on Seeking Alpha, Bloomberg, CNBC, etc. like a headless chicken? Did you ask yourself, "should I sell?" ten times every hour? Did you cuss the Gods and the lady luck for ruining your plans for buying a vacation house? Did you ... you get my drift. You are a Maniac. And I don't mean it in a good way! Look, historically speaking, on average, the stock market goes down 5% or more three times a year. You either don't understand how the stock market works, or you invested the money you need for your day-to-day life, and that makes you vulnerable to the natural behavior of the stock market. It goes down, and when it goes down, it always goes down faster than when it goes up. You probably already knew that there is a chance for your investments to go down, but you don't know how to control your emotions.

Now what? Study the history of the stock market. Being a maniac, or being a semi-maniac is not a good indicator. Use this opportunity to learn about yourself. Understand what causes you to lose your sanity and start working on it. This is a priceless learning opportunity for you to learn how the stock market works and to what extent you are in control of your emotions. Stock market investing is 10% about the numbers and 90% about having the emotional stability to listen to what the numbers tell you.

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 The Intelligent

Well hello to our intelligent investors. Let me guess what you did in the past few days. You saw the news of the market decline through whatever routine you have to keep yourself informed about the world. Most likely, you didn't do anything on the first day, beyond reading a few articles from the authors or sources you trust to understand what this is all about. Once you realized the downward trend is meaningful enough that some very well-managed companies are getting closer to becoming undervalued, you took the watchlist out; the watchlist you keep on the side to go bargain shopping whenever the stock market does what it naturally should do, going down every now and then. You used the cash you have on the side for such occasions and hit "Buy" a few times, not too many though. You wanted to stretch your cash for as long as possible to benefit from possible further decline. That's it, and you moved on with your life. If that's you, congratulations!

Now what? Nothing! Blaze on! And, thank you for being a Stock Card member! Keep looking up the Stock Cards of the companies you are interested in, and discover new ideas through Stock Card portfolios. 

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Before I let you go, let me leave you with a few facts and information about the stock market that I remind myself every time I hear about yet another stock market doom and gloom. This is a research done by Morgan Housel, a partner at Collaborative Fund and an ex-analyst at The Motley Fool. Learning from the stock market history since 1915, on average, the stock market behaved this way:

• Fell at least 10% every 11 months
• Fell at least 20% every four years
• Fell at least 30% once every decade
• Fell at least 50% 2-3 times every century

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​Understanding these numbers, at least, should give you an informed peace of mind that long-term investing works, regardless of what happens in the short-term. There is also another way of looking at these numbers, but not many have the emotional intelligence to read these numbers that way: There are only a handful of times in your life that you can go real bargain-shopping in the stock market. Don't let it go to waste!

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