Lessons from the March 2020 Stock Market Crash, 9 Months Later
By: Justin Bautista
Tags: Stocks, Finance, Investing, Lessons Learned, Psychology

As a millennial under 30, I haven’t really experienced a bear market and the March 2020 sell-off looked like the beginning of the turnaround that was promised after 11 years of a bull run. My friends and I discussed the prices of the stock market the whole week of March 9th like we were seasoned Wall Street reporters. People at work were urging me to follow their suit in readjusting their retirement plans to mitigate the blow of the stock market crash. This would prove ill-advised — 9 months after the selloff, the market recouped the loses and reached new heights.

The average investor won’t beat the S&P 500 if they manage their funds on their own. We knew this from a plethora of retrospective and longitudinal studies. But this didn’t stop people from making financial moves given the right economic nudges. Surely the world was facing a crisis, but three main psychological reasons led the March 2020 sell-off:

Uncertainty Mass Panic Disadvantaged Willpower

Uncertainty

People hate uncertainty. Imagine how we see the world back in March. As we watched China and Europe tried and failed to contain a deadly virus, it was now ravaging our big cities. The price of oil not only went to zero, but it went negative. A presidential candidate that advocated opposing political philosophy than the sitting president won a state primary election. These factors could mean huge changes to life as we know it, and it all happened in the same week. Everything was fine just a month ago and now we didn’t know what will happen next. It triggered people’s self-preservation instincts and decided to protect what they have than risk an uncertain future.

Mass Panic

The most effective marketing strategy is not ads, but word of mouth. We are incredibly susceptible to our family and friend’s opinions. You like some of them, you respect some of them, so if they are selling off maybe so should you. Most people have investments in retirement or non-qualified accounts, yet most people are not reading and learning about the capital markets every day. Most people’s brains are also lazy. So now you’re living in a lockdown and you hear people close to you make moves (people feel good about themselves if they give financial advice), but you’re not knowledgeable enough to make a reasoned decision and it seems like you’re running out of time as prices keep plummeting. So your lazy brain followed the path of least resistance and sold off on the panic.

Disadvantaged Willpower

We have weak, limited and easy distracted willpower. For some of us with experience investing and committed to a strategic plan, the elimination of commission fees and the ease of trading on mobile apps are not helping us stick to our financial plan. There is no apparent consequence in liquidating when we can buy it later if this proved to be overhyped, so why not err on the safe side and make an exception — just this one time?

Nutritionists suggest that if you want to cut your junk food eating habits, remove junk foods in your cupboard. This makes it harder for you to eat junk food because you now have to put on shoes, drive to the store, walk to the counter and pay for a bag of chips. You’re more likely to abandon your diet plans when you have junk foods around. Investing nowadays is like dieting in a room full of your favorite junk foods. We have an abundance of dubious financial advice and essentially free trading with just a tap on your phone. Your willpower has no chance.

So, now what?

Trust is generally a good prosocial behavior, but it can be causing you to make investing mistakes. Don’t trust your family and friend’s opinions. Just because they’re giving financial advice does not mean it’s good advice, nor make them qualified to do so. Don’t trust yourself in making sudden and gut-feeling financial moves. Make a strategic plan based on your goals, lifestyle and risk tolerance, then stick with it. Whenever you find yourself making an exception to this plan, understand that you might be under the influence of behavioral biases or take a step back and evaluate the situation based on the facts.