Every so often, markets experience bouts of extreme volatility. An unexpected health crisis (such as Covid-19), disappointing macroeconomic data (such as rising inflation in 2022), a geopolitical conflict (the war in Ukraine), or, more recently, Trump’s tariff war can cause indices to plummet, currently down 18.9%. And, as if in déjà vu, the cycle repeats itself: rapid declines, alarmist headlines, panicked investors… and then, over time, recovery.
At inbestMe, we’ve always championed the importance of keeping a cool head and sticking to a long-term investment plan. In line with this, we recently wrote, “What do we do for you and what do we recommend during market downturns?“
If you have a solid plan, you follow it with discipline, and generally sleep soundly, the best thing to do is: do nothing. But it’s also true that markets go down quickly (that’s why we get scared) but they rise more and more for longer periods of time, as can be seen in the following chart.
Therefore, inspired by one of the chapters in a book we recently recommended (How Not To Invest), I present below some actions that should be avoided, and then remind you of those that should be carried out.
Note: The chart reflects the bull (blue)/bear (red) markets in the S&P 500. The current declines (highs) due to the tariff war (-18.9%) have not yet exceeded 20% from the last high, and are part of the last blue mountain that had risen to a high of +72% and fallen to +47% (as of April 22, 2025).
What NOT to do when markets fall
1. Don’t react emotionally.
Emotions are an investor’s worst enemy. Fear activates our most primitive defense mechanisms, but what works for escaping physical danger is useless for managing a portfolio. Making hasty decisions can lead you to sell at the worst possible moment, just before a recovery.
2. Don’t make decisions under pressure or discomfort.
When the market is falling and you’re feeling anxious, it’s easy to want to “do something” just to ease that discomfort. But decisions made solely to soothe the suffering are often impulsive and counterproductive. The best decisions are made calmly, with perspective.
3. Don’t listen too much to “experts,” pundits, or financial influencers: they’re wrong.
Experts, commentators, and influencers who make sweeping statements about what will happen are more often wrong than right. Even leading economists predict more recessions than there have been. Even central banks must continually revise their forecasts.
In any case, they don’t know your personal situation, your risk profile, or your goals. Many are just looking for attention or clicks; they’re not really looking to help you (the aforementioned book devotes a lot of space to this; we all sell something, even ourselves). Their predictions aren’t based on your financial reality. Your plan, on the other hand, is.
4. Don’t try to predict the market.
Believing you can get out just before the drop and re-enter before the rise is a dangerous illusion. Even if you’re lucky once, you’ll likely fail the next time. Statistics work against market timing, as you have to get it right three times: when entering, when exiting, and when re-entering, and no one can get this right.
5. Don’t confuse the short term with the long term.
Daily, weekly, or even quarterly declines are noise within a decades-long view. If you start trading with a short-term mindset within a long-term strategy, you’ll lose focus… and probably money. On the other hand, if you’re investing medium- to long-term money that you need for the short term, you’ve simply made a mistake.
What TO DO when markets fall
1. Have a minimum knowledge, remember that markets are cyclical.
Cycles of ups and downs are a natural part of market behavior. Since 1950, there have been dozens of 10% corrections, and many have been followed by strong rebounds. Downs are not an anomaly: they’re the norm. Recessions also occur from time to time, but remember that markets rise longer and longer. If you have any doubts, look again at the chart above and compare the blue mountains with the red ones.
2. Follow your plan.
If you designed your portfolio with your goals and risk profile in mind, you shouldn’t change it based on a one-time reaction. Investors who abandon their strategy at the worst possible time often miss out on recoveries. Discipline is often more profitable than reaction. Panic is not an investment strategy.
3. Observe your state of mind.
Are you more nervous than usual? Can’t sleep because of the market? Maybe your portfolio isn’t well aligned with your risk tolerance. Sometimes, anxiety is a sign that you need to review your risk profile and therefore your allocation to different asset classes. But don’t do it under pressure: do it in a calm moment.
4. Keep things in perspective (and have a sense of humor).
This may sound a bit harsh; money is a serious subject, and I, for one, don’t like seeing the value of my investments plummet. But even in the midst of a bear market, it’s helpful to remember that this has happened before. And, as with other times, it will pass too. A little perspective on everything, and perhaps a little humor, helps us take a step back and avoid costly mistakes. If it helps, I think a bit the other way around: when the market falls, I think I’ll make back what I made in the previous cycle and that what I’ve lost is only temporary. As I said, a little humor.
5. Look for signs of capitulation.
This is a bit more complicated, which is why I’ve left it for last (and it’s not essential). The best times to invest (or to stay the course) usually coincide with the greatest pessimism. When everyone is selling, when the headlines are catastrophic… we may be nearing the bottom of the market. Detecting this moment is difficult, but it’s a good sign that the worst may be over, and therefore a good time to avoid panic.
Don’t look for perfection, avoid big mistakes
Investing well isn’t about doing it perfectly, but rather avoiding major mistakes (the aforementioned book devotes a lot of time to this). And during bear markets, those mistakes often come from fear, haste, or external noise. If you have a solid plan and follow it with discipline, often the best course of action is… doing nothing. It’s true that markets drop quickly (and that’s why we get scared), but they rise more and more over time. Investing is like embarking on a long journey with a destination and an approximate arrival date (our investment horizon). On this journey, stopping is not an option, as it means not confidently reaching our goal. We can look for alternative routes that better suit our needs, but always moving toward our final destination. The real risks are not reaching the goal and abandoning the journey; market drops are normal events, like traffic jams on a highway when we travel, and they shouldn’t stop us.
