Stock market turbulence can often feel like actual airplane turbulence. Like a plane dropping 200 feet in a split second, sharp market drops can panic investors and even cause physical reactions.
The studies on this show that many people are particularly bad at dealing with even the briefest market volatility, similar to the recent May drop in markets.
A 2018 study from the University of Zurich found that a 10% loss of wealth — say, a correction for someone who is heavily invested in the market — “leads” to a measurable drop in physical health, mental health, and survival rates. Notice, the language used is “leads,” which implies a causal relationship, rather than just an association.
Another study from the University of California’s Rady School of Management in 2014 looked at admission records for every California hospital between 1983 and 2011 and found a “strong inverse link” between daily stock returns and hospital admissions.
“Most papers in behavioral asset pricing explore how investor psychology influences stock prices,” the paper’s authors wrote. “We ask the opposite question.”
A few key observations: Seasonally adjusted hospital admissions found that admissions spiked over 5% on Black Monday, Oct. 19, 1987 when the Dow (^ DJIA ) dropped over 20%.
Furthermore, there was not a reversal in hospital admissions immediately following the crash, when the Dow regained about half its losses the next day. The first result suggests “immediate impact on the psychological stress of investors,” the paper reads, while “the second suggests asymmetry,” meaning that the losses hurt a whole lot more than wins.
Another study out of the University of Bozen-Bolzano in Italy found a larger than usual daily drop in the stock market was associated with a 0.5% increase in fatal car accidents.
Many investors are figuring out how to roll with the punches
Despite the academic studies detailing these troubling trends, investors appear to be dealing with the market’s whims by keeping an eye on the long-term goal — especially those saving in a tax-advantaged retirement account like a 401(k). During last year’s market troubles that crunched 401(k) balances, Fidelity told Yahoo Finance that “very few” people made changes during the tumultuous fourth quarter — just 5.6% of customers made portfolio changes, and two-thirds of those people only made a single change.
During mid-May’s uncomfortable drop, Fidelity said it didn’t notice any unusual call volume or activity, and pointed out that the market went back up soon after the drop — which meant some people may not have gotten a chance to get the news or pat their pockets.
Vanguard similarly pointed out the company had seen discipline among its customers during periods of market volatility.
“The vast majority of Vanguard investors stay the course and don’t trade,” a Vanguard spokesperson said. “Over the last four years, only about 8.5% of Vanguard’s individual investor clients placed a trade of any kind on at least one day of sharp market decline.”
Neither this nor Fidelity’s data speak to the stress that ordinary retail investors are under, of course. But one data point might suggest some cool, collected, and even optimistic thinking.
Interestingly, Vanguard said that on sharp down days, more trades are buys than sells, “which could be interpreted as investors trying to take advantage of the market decline to buy the dip.”