Category: The Long Game · Reading time: 9 minutes · By Stuart Welch
At some point — possibly soon, possibly not for years, but certainly at some point — you will open your investment account and find it is worth less than you put in. The number will be red. There may be a minus sign. Here we talk about what to do when the stock market falls.
How you respond to that moment will have more impact on your long-term financial outcomes than almost any other decision you make as an investor.
So let’s talk about it before it happens. Because understanding it in advance is the only reliable way to handle it well when it does.
What’s actually happening when markets fall
A stock market index — the FTSE 100, the S&P 500, the MSCI World — measures the collective value of the companies within it. When it falls, those companies haven’t changed. Their factories are still running, their staff are still working, their products are still being sold. What’s changed is what investors are currently willing to pay for a share of those companies.
Market falls are primarily changes in sentiment and pricing, not changes in the underlying reality of the businesses involved. They happen for all sorts of reasons — recessions, interest rate changes, geopolitical crises, plain old panic. The specific cause rarely matters as much as the financial media suggests. What matters is the pattern of what comes next.
What the historical record actually shows
Every significant market fall in modern history has been followed by a recovery. Not eventually, in some vague long-term sense — but specifically, measurably, within a timeframe that matters to long-term investors.
| Three crashes. Three recoveries.Dot-com crash (2000–2002): markets fell roughly 50%. Diversified investors who stayed the course recovered within 5–7 years.Financial crisis (2008–2009): markets fell roughly 50%. Recovery took approximately 3–5 years.COVID crash (March 2020): markets fell roughly 30% in weeks. Recovery took approximately 6 months.In every case, investors who stayed invested recovered. Investors who sold during the fall did not. |
There is no guarantee that future crashes will follow this pattern. But you would need to believe that the global economy will permanently stop functioning for long-term investing to be a losing proposition. That’s a more extreme position than most people realise they’re taking when they sell in a panic.
The most expensive mistake in investing
It has a name: panic selling. It happens in every significant downturn. An investor watches their portfolio fall, reads about further falls being predicted, hears that colleagues have moved to cash, and sells — locking in losses that would otherwise have recovered.
The tragedy is that it’s not stupid. It’s a rational response to frightening information. The problem is that the rational response to short-term market fear is almost always the wrong response for a long-term investor.
Here is the scenario that plays out, in some variation, every time. An investor — call her Sarah — opened a Stocks and Shares ISA two years ago. She put in £300 a month. Everything was fine. Then the market fell 30% and her portfolio dropped from £8,000 to £5,600. The news was grim, a colleague had moved to cash, and she sold.
Six months later, markets had recovered. A year later, they were above the pre-crash level. Sarah was still in cash, unsure when to get back in, missing the recovery entirely. Her portfolio — had she held it — would have been worth over £11,000. Instead she had £5,600 and a lesson she’d paid dearly for.
This is not a cautionary tale invented for effect. It is the most common and most costly mistake in investing, repeated by millions of people in every market downturn in history.
Why ‘waiting for things to calm down’ doesn’t work
The logic sounds reasonable: move to cash during the fall, reinvest when things stabilise. In practice it has one fatal flaw. You have to be right twice — you have to sell before the worst of the fall, and reinvest before the recovery is fully priced in. Professional fund managers with entire research teams consistently fail to do this reliably. The idea that an individual investor can time it successfully is, to put it gently, optimistic.
There’s also this: the best days in the market tend to cluster around the worst days. Big recoveries happen in the middle of downturns, as oversold markets snap back sharply. An investor sitting in cash during a crash will typically miss those days — and missing even a handful of the best days in a decade can dramatically reduce long-term returns.
| The cost of missing the best days:Missing just the 10 best trading days in a decade can roughly halve your long-term returns compared to staying fully invested throughout.Those days are almost impossible to predict. The only reliable way to catch them is to already be invested when they happen. |
What you should actually do
Nothing.
Do nothing. Don’t sell. Don’t move to cash. Don’t wait for things to calm down before reinvesting, because by then the moment has passed.
If you have a regular monthly contribution going in — keep it running. You’re now buying more units at a lower price. When the recovery comes, you benefit more from it than you would have if markets had never fallen.
If you have spare cash you were planning to invest anyway — a market fall is not a bad time to do it. Buying when prices are lower and holding for the long term is, by definition, sensible investing.
What you should not do is make any decision driven primarily by the emotions the fall has generated. Fear is a natural response to watching the value of your money drop. It is also one of the worst possible guides to an investment decision.
Making it easier to do nothing
Knowing you should do nothing and actually doing nothing are different things. A few things that help:
Understand what you own before a crash happens. If you know that your global index fund holds thousands of companies across dozens of countries — that it is not going to zero, that every previous fall has recovered — you are less likely to panic when it falls.
Have an emergency fund in cash. One reason people sell investments during market falls is that they’re worried they might need the money. Three to six months of essential expenses in a savings account means a falling portfolio is a number on a screen, not a crisis.
Don’t check it daily. Watching the number go down every morning achieves nothing except making you more likely to do something you’ll regret. Quarterly is plenty.
Remember your time horizon. If you won’t need this money for fifteen years, a 30% fall today is uncomfortable but ultimately irrelevant. The money has fifteen years to recover and grow. That has always — in the entire history of diversified global investing — been more than enough time.
The short version
Markets fall. They always have. Every significant fall in history has been followed by a recovery. The investors who came out the other side in good shape were the ones who stayed invested, kept their contributions running, and didn’t let fear make their decisions for them.
Your future self, looking back from the other side of the recovery, will be very glad you did nothing.
| Want to know exactly how to handle a market downturn — step by step?Simple Investing for Absolute Beginners has a full chapter on what to do when markets fall, including a practical framework for staying the course when everything feels wrong.[ Find out more → ] |