How to Pass the Stock Market’s Stress Test

A quick announcement before I begin today’s post – My new book, Boundless, is now available for ordering!

After a wonderful response during the pre-order phase, I finally have the book in my hands and am shipping it out quickly. If you’d like to get your copy, click here to order now. You can also claim a special discount if you order before 20th Feb. 2025.

Plus, I’m offering a special combo discount if you order Boundless along with my first book, The Sketchbook of Wisdom. Click here to order your set.

A lot has been written about the turmoil in the Indian stock markets over the past few months. To be precise, the BSE-Sensex has dropped by 11% in the last five months, while the small-cap and mid-cap indices are down around 18% each.

Social media is full of panic posts, and your WhatsApp groups probably have more ‘expert advice’ than a financial conference.

But the thing is that this fall, like any, is not just a financial event. It’s an emotional stress test. And today, I share ways you can pass it.

So, just like banks and financial institutions go through stress tests to prove they can survive financial shocks, investors face emotional stress tests when markets fall. It’s not about numbers anymore, but about the mindset. Market crashes don’t just test your portfolio but also expose the cracks in your thinking. They reveal how fragile or resilient your emotions are when your investments take a hit. And that’s where the real challenge lies.

Let me now introduce something that might change how you see this crash: The Investor’s Emotional Balance Sheet.

Imagine this like a regular balance sheet but for your mind. Just like companies have financial balance sheets to track their health, every investor has an emotional balance sheet that reflects their mental and emotional well-being during volatile times. And trust me, it matters just as much as the numbers on the annual report you are reading.

Let’s look at each item of this balance sheet one by one.

On the Assets side, you’ve got patience, conviction, and rational thinking.

1. Let’s take patience first, which isn’t just about waiting but about enduring the discomfort of seeing your portfolio in the red without making knee-jerk decisions. Wealth doesn’t grow overnight. It grows quietly, often when you’re doing nothing.
2. The second item on the Assets side is conviction, which is about having a strong belief in your investment process and choices, even when the market is telling you that you may be wrong. Now, this is not stubbornness but is grounded in research, understanding, and knowing why you made the decision in the first place.
3. The third item on the Assets side is rational thinking, which is making decisions based on facts and logic, not emotions. It sounds simple, but when fear kicks in, logic often takes a back seat. Rational thinking helps you zoom out, see the bigger picture, and avoid becoming your own worst enemy.

Anyways, just like any balance sheet, there are liabilities.

1. Fear is the number one culprit behind panic selling. It magnifies your losses in your mind, making a temporary fall feel like the end of the world.
2. Then there’s herd mentality—the “everyone’s doing it” syndrome. It’s easy to get swept up in the crowd, but remember, the crowd isn’t always right. Often, it’s following emotions, not facts.
3. And let’s not forget short-term focus, where you obsess over daily price swings like your life depends on it. The fact is that it doesn’t. This mindset of short-term thinking only leads to stress, poor decisions, and probably a lot of sleepless nights.

Now, the most interesting part of this balance sheet is its third side, which is emotional resilience, and which is your equity. Simply, emotional resilience is the ability to take a hit and not fall apart, and what keeps you grounded when everything else feels shaky. It’s not about never feeling fear or doubt, but about not letting those feelings control your decisions. You build it through experience, reflection, and, sometimes, by simply surviving tough times.

The Sketchbook of Wisdom: A Hand-Crafted Manual on the Pursuit of Wealth and Good Life.

This is a masterpiece.

– Morgan Housel, Author, The Psychology of Money

When markets are soaring, it’s easy to call yourself a long-term investor. But when prices crash, that’s when your true emotional balance sheet shows up—and for many, the liabilities are bigger than they thought.

As I look around, I see that most investors today are young and started their journey after 2020, when markets were basically on steroids. Quick falls were followed by quick recoveries, and it felt like you couldn’t lose. But the current fall looks a bit different (you may have already heard of Sankaran Naren of ICICI Prudential AMC sounding alarm bells on how current valuations in the small and mid-cap space are as expensive as 2007, or just before the last major financial crisis in 2008).

Nobody knows till when the current fall is going to last, and there’s no magic recovery button. For many, this is the first real taste of financial discomfort, where hope doesn’t bounce back overnight.

But the thing is that this fall, like all market falls in the past, isn’t a curse but a rite of passage. Every seasoned investor has scars from market crashes. They’re like badges of honour because they teach you lessons no bull market ever can.

It’s important to zoom out in the current times, and imagine your portfolio as a forest, not just a single tree. A tree may wither temporarily, but the forest thrives over time. Market crashes are like harsh seasons—tough, but necessary for growth.

It’s also important to revisit your ‘why’. Why did you start investing in the first place? Was it for quick wins or long-term wealth?

Market crashes aren’t new. They’ve happened before, and they’ll happen again. What matters isn’t the crash itself—it’s how you respond.

Remember that while markets fall, financial fortunes may shrink. But the invisible wealth—which is patience, wisdom, and resilience—compounds forever. This isn’t just a test of your portfolio, but a test of your character.

Have you seen The Inner Game podcast that I publish on YouTube? If not, please check out here. Also, here is the video version of the above post that you can find on YouTube: