Recently, someone asked about the US stock market circuit breakers again, and I remembered experiencing that crazy month in 2020, when the market hit the limit down four times in a short period. Even Warren Buffett has only seen the market hit the limit five times in his lifetime. That was truly a rare event.

Talking about the US stock market circuit breakers, many people get scared just hearing about them. In fact, they are a protective mechanism of the market. Imagine when the stock market crashes sharply, and everyone is panic-selling, emotions completely out of control. At this moment, it’s like someone presses the pause button, giving everyone 15 minutes to calm down and rethink. It’s similar to watching a horror movie and needing to pause because your heart can’t take it—US stock circuit breakers are based on this concept.

The mechanism is actually quite simple. If the S&P 500 index drops 7% compared to the previous trading day’s close, it triggers a Level 1 circuit breaker, and trading is paused for 15 minutes. A 13% drop triggers a Level 2 circuit breaker, pausing trading again for 15 minutes. If it drops 20%, that’s a Level 3 circuit breaker, and trading is halted for the rest of the day. These rules have been in place since 1988, aiming to prevent excessive market volatility.

Why was this mechanism established? Mainly because of investor sentiment issues. When the stock market drops sharply, people are most prone to panic. Seeing others sell off, they follow suit, creating a vicious cycle. The circuit breakers act as a pause button during these times, allowing everyone to calm down and reassess the situation instead of being completely driven by emotion.

The most memorable time for me was March 2020. At that time, the COVID-19 pandemic had just erupted, and the future was completely uncertain. Plus, the failure of oil negotiations between Saudi Arabia and Russia caused oil prices to plummet, throwing the entire market into chaos. Within just a month, the S&P 500 triggered four circuit breakers, and the Dow Jones Industrial Average even fell by 31%. The level of panic during that period, I can still feel the atmosphere when I think back.

Actually, the US stock circuit breaker mechanism isn’t perfect. On one hand, it can indeed help ease market emotions, but on the other hand, some investors might become more anxious, worried that once the circuit breaker is triggered, they won’t be able to sell in time. So, as the market approaches the limit, some may accelerate their sell-off, which can actually increase volatility.

If I encounter a US stock circuit breaker again, my advice is not to panic excessively. Stick to a cash-is-king strategy, ensuring the safety of your principal and liquidity. During extreme market pessimism, it can be a long-term investor’s opportunity—provided you have enough cash reserves to weather the storm. Circuit breakers are just a normal market response mechanism; there’s no need to demonize them. Approach them rationally.