When the Market Tanks, the Doctor Gets Busy

Here is an interesting thought. Are stock market movements and the number of hospital admissions related? It seems they might be.

According to a study done by Joseph Engelberg and Christopher Parsons, associate professors of finance at the University of California at San Diego, there is a strong inverse link between daily stock market movements and hospital admissions, especially for psychological conditions such as anxiety or major depression. The study showed that a one-day freefall in equities of around 1.5% is followed by about a 0.26% uptick in California hospital admissions on average over the next two days.

There was another study that showed that, during the recent sub-prime crisis, there was a significant correlation between the period of stock market decrease and rates of heart attacks.

The findings are not surprising. Logically, we know that a drastic fall in share price usually causes our heart to go on overdrive, especially when the drop is sudden.

Welcome to the Norm

Such share price plunges are part-and-parcel of long-term investing. Since 1928, the S&P 500 index (SNPINDEX: ^GSPC) in the US has seen a 10% drop from the most recent high as often as every 11 months. Every four years, the market plunges 20%. Scary, isn’t it?

During the sub-prime crisis, Straits Times Index (SGX: ^STI) fell more than 60%, dragging with it almost every listed company in Singapore Exchange. At one point, companies such as media giant, Singapore Press Holdings (SGX: T39) and telecommunications provider, Starhub Limited (SGX: CC3) were down more than 40%. Battlestar Gallactica would have paled in comparison to the rollercoaster ride investors were taken in for.

Take a Step Back

During such cases, what are investors to do?

Instead of being trigger-happy and clicking the “Sell” button irrationally, we have to rationalize with our mind and come up with an informed decision. Stocks are not mere pieces of paper. Behind every ticker symbol is a business.

Having an investment logbook where you log down the reasons why you have bought the stock helps. This will come in handy to decide your next course of action during a market crash.

If the reasons we bought the stock in the first place are still valid, it might make sense to buy more at a lower price. If we liked the investment to buy it at a much higher price, shouldn’t we just love it more now that the price is lower?

Foolish Bottomline

In the future, when the market tanks (it will!) and you feel that your heart has skipped a beat or two, take a step back and re-evaluate the situation. Doing so will do your portfolio and yourself a huge favour.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.