For many of us, the memory of the 2008 market crash is fading, but the lessons it imparted remain crucial. Those who held onto their investments through the turbulent period and didn’t sell in panic likely came out ahead in the long term. Market downturns, as unsettling as they can be, are a normal part of investing, and they can happen when least expected. The COVID-19 pandemic serves as a recent example of how markets can fall dramatically, seemingly out of nowhere. However, what truly matters is how investors respond during these difficult times.
The immediate reaction to a market downturn might be to sell investments and retreat to thesidelines. Emotions like fear and anxiety can drive such decisions, leading to investors selling when the market is down and locking in their losses. While this is a natural reaction, it can be
counterproductive in the long term. Instead, maintaining a strategy of cash flow management and a deep understanding of the markets can help investors weather the storm without making irreversible mistakes.
The following three reasons will help reinforce why selling during a market downturn is typically not the best course of action.
1. Downturns Are Followed by Upturns
One of the most significant concerns during a market decline is loss aversion. Investors often panic and worry that they’ll lose more money if they don’t sell their investments quickly. But history has repeatedly shown that after every downturn, there is an upturn. Markets stabilize, and portfolios tend to recover from their losses, sometimes even growing to greater heights than before the downturn.
When investors sell during a market downturn, they turn what is often a temporary drop in value into a permanent loss. Instead of waiting for the market to recover, they realize their losses by selling low, effectively locking themselves out of potential gains when the market bounces back. If you stay invested during tough times, you’re likely to recover your losses as the market improves. More importantly, you’ll be in a position to ride the upward trend that often follows.
It’s undoubtedly difficult to watch your portfolio lose value and do nothing. However, data shows that bear markets—defined as declines of 20% or more—are typically short-lived compared to bull markets. Bear markets last, on average, just over a year, while bull markets have historically lasted four times longer, with gains that significantly outpace the losses. By staying invested, you ensure you’re still in the market when the recovery happens, allowing your portfolio to grow.
For those nearing retirement, a more conservative asset allocation is essential to protect against severe volatility. But even conservative investors should avoid making hasty decisions during a downturn, as doing so can disrupt long-term financial plans.
2. Timing the Market is Incredibly Difficult
One of the biggest misconceptions in investing is the idea that you can successfully time the market—selling at the peak and buying back in at the bottom. Unfortunately, predicting market movements with any accuracy is incredibly difficult, even for seasoned investors. Market timing involves tremendous risk, and the consequences of getting it wrong can be severe.
Statistically, some of the best-performing days in the stock market occur shortly after the worst days. Missing these key days can drastically reduce your long-term returns. A famous study by J.P. Morgan highlights the danger of missing out on these best days. According to their research, if an investor had stayed fully invested in the S&P 500 between 1999 and 2018, they would have seen their portfolio grow significantly. However, an investor who missed just the 10 best days in the market over that 20-year period would have earned far less, and missing 30 of the best days could lead to net losses.
The takeaway is clear: trying to time the market by selling during a downturn and waiting for the perfect moment to buy back in often results in more harm than good. Instead, a disciplined, long-term investment strategy that includes dollar-cost averaging—continuously buying shares at regular intervals—helps investors take advantage of lower prices during downturns and build a stronger portfolio for the future.
3. Stick to Your Long-Term Plan
Investing is a long game. For those with a 20- or 30-year time horizon, short-term market fluctuations should not distract from their overall financial goals. This concept of staying the course is particularly important during market downturns. Selling investments in a panic disrupts your long-term strategy and often results in missed opportunities.
A well-diversified portfolio, consisting of a mix of asset classes like stocks, bonds, and real estate, can help reduce volatility. When one part of the market suffers, another may remain stable or even grow, helping to mitigate losses. By sticking to a diversified approach and regularly rebalancing your portfolio to maintain your desired asset allocation, you can stay on track even during periods of uncertainty.
It’s also important to continue contributing to your portfolio during downturns. If you’re investing a fixed amount of money into your portfolio every month, continue to do so, even when the market is declining. This allows you to buy more shares when prices are low, setting yourself up for greater gains when the market rebounds.
During the 2008 financial crisis and the market volatility that followed events like the Brexit referendum in 2016, investors who remained committed to their long-term strategies ultimately fared better than those who sold off their assets in fear. This is because, over time, the markets recovered and continued to grow. Those who stayed invested benefited from the subsequent bull markets, while those who sold missed out on those gains.
Keeping Calm in Bear Markets
One of the hardest things to do during a bear market is to remain calm. Emotions can easily get the best of investors, causing them to make rash decisions that negatively impact their financial future. However, maintaining discipline during these times is critical.
When you first begin investing, create a plan that includes not just your investment goals and strategies but also a course of action for dealing with market downturns. Remind yourself that bear markets are temporary and will eventually end. Try to avoid the constant stream of bad news that can heighten fear and lead to impulsive decisions. Finally, if you’re feeling particularly anxious, consult with a trusted financial advisor who can offer you objective advice and help you stay focused on your long-term goals.
Conclusion
Market downturns are inevitable, but they don’t have to spell disaster for your investments. By understanding that bear markets are temporary, recognizing the futility of trying to time the market, and sticking to your long-term investment strategy, you can weather these downturns and position yourself for future success. Rather than letting fear dictate your actions, use a market downturn as an opportunity to buy shares at discounted prices and strengthen your portfolio for the future.
With patience, discipline, and a well-thought-out plan, you’ll be better equipped to handle market volatility and come out ahead when the market recovers.
Avantax affiliated Financial Professionals may only conduct business with residents of the states for which they are properly registered. Please note that not all of the investments and services mentioned are available in every state. Securities offered through Avantax Investment Services℠, Member, Investment Advisory services offered through Avantax Advisory Services℠, Insurance services offered through an Avantax affiliated insurance agency. 3200 Olympus Blvd., Suite 100, Dallas, TX 75019. 972-870-6000.
The Avantax family of companies exclusively provide financial products and services through its financial representatives. Although Avantax Wealth Management® does not provide or supervise tax or accounting services, Avantax representatives may offer these services through their independent outside business. Content, links, and some material within this website may have been created by a third party for use by an Avantax affiliated representative. This content is for educational and informational purposes only and does not represent the views and opinions of Avantax Wealth Management® or its subsidiaries. Avantax Wealth Management® is not responsible for and does not control, adopt, or endorse any content contained on any third party website.
This information is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation.
The information being provided is strictly as a courtesy. When you link to any of the web sites provided here, you are leaving this web site. We make no representation as to the completeness or accuracy of information provided at these web sites. Nor is the company liable for any direct or indirect technical or system issues or any consequences.