Market crashes aren’t a normal part of the stock market, but they do happen — about once every decade. These events are significant at the time, but they’re usually short-lived. Despite this, they’re important to remember because they reveal the deep connection between our emotional and financial lives.
This week’s sell-off of stocks was triggered by President Trump’s threats of a bruising trade war with China. But even if you don’t have money invested in Chinese companies, it’s not uncommon to see your portfolio lose value. These sudden declines are difficult to stomach, and they can erode your sense of personal wealth and security.
In fact, many Americans are directly affected by the financial stress of a market crash. A recent study analyzed medical records of millions of American investors and found that when the local stock market lost significantly, antidepressant prescriptions and psychotherapy sessions increased disproportionately. This wasn’t because of general economic gloom or worries about job losses, but rather the psychological impact of losing money in their own personal accounts.
Investors need to be prepared for these events because they will happen, and there’s no way to avoid them. The key to navigating them is to understand the factors that lead to crashes and how they are typically measured. A typical method is to look at the “pain index,” which takes into account the magnitude of the decline and how long it took to recover. These metrics are often compared with those of other market crashes to determine their severity.
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