How to Deal With the Harsh Reality of a Stock Market Crash

Short practical advice (may skip) – If you cannot withstand losing a bit of your money in a stock market crash (where things easily go from bad to worse to brutal), please stay away from stocks. But if you are fine with the risk of losing some money in the short run in return of wealth creation in the long run, keep owing your good stocks and/or good mutual funds. Buy more (and keep buying) if you believe the quoted (now lower after the crash) prices offer great value in the long run. Then, once you are with your chosen good investments, just get going with other more important things in life like family, work, and self-development…and let go of the outcome of your investments. Accept that whatever happens, happens.

Slightly long theoretical advice (must read) – I read a nice article earlier today on dealing with life’s harsh realities – sharp fall in stock prices is one such reality for most investors – and here is an excerpt from the same…

…the only intelligent thing to do when such turbulent change occurs is for us to sit back and realize that we are only to be witnesses to change, and to respond to it rather than to react to it — much like we would watch a movie unfold on the screen and laugh at the funny bits and cry at the sad bits, while always knowing that what is happening before our eyes is unreal.

Modern quantum physics after Einstein also points us this way — it says that what occurs depends upon the observer, and not on what is observed. So, in effect, as a witness, I am free to choose my response, and therefore the reality I actually experience.

I wrote a post last week on the three iron rules of life and investing, and this post I read today reminded me of the same.

It’s sad, but we often like to believe we can enjoy stock market gains without losses. And that denial is what causes us stress and conflict. We feel disappointed when the harsh reality doesn’t align with our rosy expectations. And then we feel helpless, which further magnifies our disappointment.

Most of what happens in the stock market is outside of our control. We can’t stop the market from falling and crashing, nor can we call up companies or the stock market regulator or the central bank when our stocks tumble. We also don’t control the returns we make. But then, we have some control over the risks we take, the costs we incur, the time we give for compounding to work, and ultimately how we behave.

Through my little experience as an investor and that of seeing others who have done well over time, I realize that investing peace comes from being at peace with the risk, accepting our lack of control and letting go of the outcome, whatever it may be.

Of course, the risk of losing money is real in such times. Actually losing a lot of money fast is painful. But you should learn to relax if you believe the decision you made of owing the stocks you own was fine and that the long-term positive reality of the underlying businesses won’t change.

Making and losing money is just the nature of investing, and often outside your control. So just do your work well, and then let it go.

I would leave you with this beautiful poem, which has helped me during several periods of turmoil in my life…

IF
by Rudyard Kipling

If you can keep your head when all about you
Are losing theirs and blaming it on you,
If you can trust yourself when all men doubt you,
But make allowance for their doubting too;
If you can wait and not be tired by waiting,
Or being lied about, don’t deal in lies,
Or being hated, don’t give way to hating,
And yet don’t look too good, nor talk too wise:

If you can dream—and not make dreams your master;
If you can think—and not make thoughts your aim;
If you can meet with Triumph and Disaster
And treat those two impostors just the same;
If you can bear to hear the truth you’ve spoken
Twisted by knaves to make a trap for fools,
Or watch the things you gave your life to, broken,
And stoop and build ’em up with worn-out tools:

If you can make one heap of all your winnings
And risk it on one turn of pitch-and-toss,
And lose, and start again at your beginnings
And never breathe a word about your loss;
If you can force your heart and nerve and sinew
To serve your turn long after they are gone,
And so hold on when there is nothing in you
Except the Will which says to them: “Hold on!”

If you can talk with crowds and keep your virtue,
Or walk with Kings—nor lose the common touch,
If neither foes nor loving friends can hurt you,
If all men count with you, but none too much;
If you can fill the unforgiving minute
With sixty seconds’ worth of distance run,
Yours is the Earth and everything that’s in it,
And—which is more—you’ll be a Man, my son.

Triumph (stock market gains) and disaster (stock market losses) are just two imposters, as Kipling writes. Treat them just the same, and you will be fine in life and investing…come what may.

Feel better now?