Crises on the capital market: why they are rare – and how they deal with it confidently

Historically, major economic and financial crises like the oil shock in the 1970s, the 2000-famous tech bubble, the global financial crisis in 2008, and the recent coronavirus pandemic in 2020 are rather rare events. Such drastic crises often leave deep traces in the collective memory of the investors and cause fears.Nevertheless, past experiences show that even minor, but still violent market fluctuations – also so-called “slight” corrections – can put a considerable strain on investors’ minds. Some are surprised when they learn that the US stock market lost more than 20 percent in value between 1979 and 2022 every fourth year in a year.These statistics reveal how often and regularly there are major fluctuations that appear threatening at first glance, but in reality are part of the normal market.

Typical scenarios: When the media panic

A vivid example of a so-called “sham crisis” is the year 2016. At the beginning of the year, the leading German index DAX had lost more than 20 percent in value since the end of November 2015. Despite these significant losses, many investors who actually acted rationally expressed an amazing attitude. One of my clients, an otherwise very sober investor, said at the time: “That myDepot 7 percent is in the red, doesn’t really bother me that much. But the news situation is so bad…” This statement shows how strongly the media can influence mood. The combination of bad news and falling prices is anything but unusual in the financial market. It’s almost a kind of rule that bad news often go hand in hand with falling prices.What exactly happened back then? What event has made the markets so unsettled that the renowned business medium Focus Money headlined on January 27, 2016: “Should I really sell all my stocks? The biggest crash of this generation comes. Big bank warns of a 75 percent burglary.” This was a panic report that scared many investors. manyAt that time, they used the sale of their shares, although there was hardly any concrete, tangible reason for it. A month later, even Professor Hans-Werner Sinn, one of the most respected economists, was again lifted to the title in a large business newspaper with an extremely pessimistic scenario – even though he himself had no direct connection to the reports. heEven assured that he had never spoken to the authors and that such assessments only came from the public discussion.

The influence of the media on investor behavior

These examples are examples of how the media and scaremongering significantly influence the behavior of investors. Do you remember the market situation in 2000, just before the Corona pandemic broke out? On February 17, 2020, the DAX was at 13,795 points. Within just a month, the index fell by 40 percent. Related images were available throughout Europe, USA, Asia and inemerging markets. For many investors who were invested at the time, it felt like a nightmare: the prices slipped into the cellar, and trust in the market was fading. The fear of losing everything was tangible.

Emotions in times of crisis: More than just numbers

When prices fall, it’s not just a question of on-screen numbers for investors. It’s about much more – about your own safety, the future of the family and your trust in your own ability to preserve the assets. This feeling of threat is understandable and human. It is absolutely normal to feel fear in such phases. That’s why it’s so importantto question your own reactions and to critically put the previous investment strategy to the test. But the big question is: How can you do this without panicking or making wrong decisions?

Psychological mechanisms in times of crisis: fear and irrational reactions

Especially in times of great uncertainty, many people resort to terms such as “volatility”, “maximum draw down” or “value at risk”. These technical terms are used in the financial world, but at their core they mean nothing more than stress, fear and panic. If markets collapse by more than 30 percent, their own portfolio is down 20, 30 or even more percent, investors feel theHardness of these losses deep inside. What is really at stake is not only the account, but above all your own quality of life.

Why fear is so understandable in times of crisis

Isn’t it human to worry? Isn’t it even rational to question old decisions to limit the damage? Especially when the price crash during the Corona pandemic, there were many reasons that increased fear: Pictures of fully loaded coffins in Bergamo, fear for one’s own health or those of the relatives, social isolation, homeschooling, uncertaintiesat work and in your own company. In such situations, it is almost impossible to remain calm and rational.

Long-term crises: When the crisis lasts longer

While the Corona crisis was recog- nized relatively quickly, the major financial crises of the past were much more protracted. The 2008 crisis, triggered by the collapse of Lehman Bank in September, dragged on for several months. Prices fell significantly more during this long phase, and the losses were even more common compared to current crises.more serious. It took a long time for the markets to recover.

Dealing with losses: How to get through the crisis

In times like this, many ask themselves the question: How can you even get through this without giving up everything? Isn’t it perhaps even wiser to rethink your own investment strategy? In such crises, the temptation to sell everything to relieve the pain is great. But this decision often has serious consequences: virtual losses become real ones thatpermanently impair the quality of life.

The vicious circle of panic sales

Many investors are panicking to sell everything to stop the pain. They believe they have prevented the worst. However, this is a dangerous misjudgment. In reality, they realize losses that can hardly be made up for later. The hope of getting back to the point of re-entering later is usually an illusion. As they hesitate, prices riseContinue on, and the investors are sitting on the edge watching how they would have to shop more expensively than they sold.

Why Irrational Action is So Common in Crises

Although most people know the theory that you shouldn’t sell in panic, they still act like this – out of loss aversion, i.e. the fear of losing money. This behavior is deeply rooted in our psyche. Many even streamline their actions: “I have to go out now to prevent even worse,” or “I’m responsible for my family.” This rationalJustifications only conceal the real cause: the fear of loss and insecurity.

Psychological background: Why losses are so painful

This behavior can be explained scientifically: The so-called loss aversion is a concept from the Nobel Prize-winning behavioral economy. It says that losses are felt emotionally twice as much as the same size gains. That means the pain of a loss is twice as intense as the joy of gaining equal amounts. It used to be useful to do thatSecure survival, because in nature it was more important to avoid losses than to maximize profits.

Evolutionary roots of our reactions

These deep-seated behavior patterns come from a time when people were still facing real life-threatening dangers. The escape or attack behavior was vital to escape predators. In today’s capital market, this means that when there is an impending loss, many investors react reflexively with flight, even if this is unreasonable in the modern world. The evolutionaryPatterns anchored in our DNA still work today – just in a completely different context.

Emotions as a survival mechanism: why we react so strongly to losses

When the stock market crashes, the barn inside burns, mice run through the granary, the potatoes rot just before harvest. The feeling of danger, loss and threat is deeply rooted in us. These emotional reactions are so old that they can even be detected in primates. They are remnants of our history of development and our cultural memory.

The Conflict Between Instinct and Modern World

But these ancient behavioral patterns, which ensured survival in the past, are often counterproductive today. A crisis on the capital market is not a saber-toothed tiger that attacks immediately. Our life is based on knowledge, services and innovation. The old patterns of flight behavior in the complex world of financial markets only lead to us harming ourselves.

How to control your emotions

In order to not only be overwhelmed by emotions in such situations, it is essential to develop techniques to control your own feelings. It’s about learning strategies that recognize and get a grip on the deeply rooted reaction patterns. This is the only way you can act smart in the long term and consistently pursue your asset strategy even in turbulent phases.

Control of Emotions – The Key to Success

Crises and market slumps are inevitable components of investing. The decisive factor is how they react to it. Anyone who understands their emotions, controls them and remains disciplined in a targeted manner can remain calm and pursue their goals even in difficult times. Ultimately, it’s not just about numbers on the account, but about your quality of life, your security and your inner peace.These can only be preserved if they develop a conscious attitude based on expertise, composure and self-control. This is the only way they can be successful in the long term – regardless of the fluctuations in the markets.