Why investors shouldn’t panic when markets fall

Market downturns frequently grab headlines and may cause anxiety for investors, but it's important they remain calm and avoid panic to prevent locking in losses.

There have been lots of times when markets have dropped, either small blips that last a day or longer periods of falls that take time to recover. It can be easy for investors to react emotionally to markets, panic and sell their investments for fear of losing money. But history shows us that that can be a mistake.

Emotional reactions

Investing money in the markets comes with the understanding that prices can fluctuate. Stocks and shares have historically provided better returns than keeping cash in the bank, but there's also the possibility of losing money. People accept this risk for the chance of higher rewards over the long term.

Reacting hastily to challenging times isn't advisable. Selling after market declines will lock in your losses, and you might miss out on potential gains when share prices rebound. While it's not guaranteed, history suggests that many markets recover swiftly from periods of turmoil.

Example of a market drop

Let’s look at a recent market fall, when Russia invaded Ukraine. The FTSE 100 index in the UK dropped by nearly 4% in a day. Many share prices fell by an even greater amount. However, the following day, the FTSE 100 recovered most of that lost territory as sanctions were put on Russia by the West.

Whilst it might feel like a big event, market falls are a normal part of investing. According to Citi strategists, historically, the S&P 500 index of companies in the US has on average fallen by more than 5% three times a year since the 1930s, with larger drops occurring less frequently. So, while it’s not very fun for investors, it’s certainly not unusual.

Don’t tinker

Constant tinkering with your portfolio should be avoided. It is tempting to keep dumping any positions that aren’t rallying - firstly for fear they will never make you money, and secondly because you want to use the proceeds to buy more of what’s already doing well.

You might be better off looking at poorer holdings and seeing if something has changed to the investment case - if the answer is no, don’t sell it unless you really need the cash.

In general, a diversified portfolio should always have something that isn’t doing as well as other positions. The whole point is to spread your risks in different areas of the market with differing industries and differing countries. If you put all your money in one part of the market, you would really feel the pain when that area goes out of favour.

Although investing during turbulent periods can be unsettling, it's crucial to stay calm and endure the market fluctuations. Consider those who remained steadfast during the Covid sell-off in February 2020, the global financial crisis in 2008, and numerous other challenging times when share prices dropped and then recovered. Investing requires patience, and with time, the rewards will hopefully follow.