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What Should You Do When Stock Markets Fall? (Hint: Don't Sell)

It's been a turbulent start to 2022, with investors focused on geopolitical turmoil that no one could have predicted. The crisis in Europe sent shares tumbling,1 and came hot on the heels during a tech sell-off.2 Volatility could be set to continue as oil prices soar and investors fret about rising interest rates and inflation, even as the pandemic rumbles on.

Volatility is a fact of life for investors, although some periods are worse than others. When markets are falling, it's tempting to press the eject button and take yourself out of the firing line, but history tells us that's usually the worst thing you can do. So what should you do instead?

 

Don't do what other investors do

Studies show that individual investors tend to be fearful in volatile markets and often sell at the worst possible time. This is called trying to time the market, and it usually has a large opportunity cost in the long run. For example, if you sold right before a significant uptick in share prices, you could miss the best month for the stock market during that year, dragging down your long-term returns.

Morningstar analysts looked at stock market performance between 1926 and 2019 and found that, in seven out of 29 years, missing the best month would have dragged otherwise positive returns into negative territory. 3

“It is very difficult to time the market consistently," said Morningstar's chief markets editor Tom Lauricella, adding that “unsuccessful market timing can lead to a significant opportunity loss." This research clearly illustrates that when emotion (specifically panic) drives your investment decisions, you could be heading for trouble.

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When investor whims are driving price falls rather than company fundamentals, it could be a good time to grab a bargain.

Be greedy when others are fearful

Markets are driven by fear and greed, the old adage states. If you can hold your nerve and be greedy when others are fearful, you could do well out of a market crash by snapping up discounted stocks. (Of course, there are no guarantees.)

Professional investors usually keep some cash at the ready to deploy when quality stocks are selling off because of "investor sentiment;" that is, how investors are feeling about the market at that time. When investor whims are driving price falls rather than company fundamentals, it could be a good moment to grab a bargain.

One caveat here is: don't buy any old stock just because it's cheap or you could get caught in a value trap. This is when a stock looks undervalued but in fact it's in distress or otherwise cheap for a very good reason. Ideally, consider topping up on quality investments you've already researched or already own.

 

Take stock

Why have you made the investment choices you've made? What are you aiming to achieve? As long as your investment portfolio matches your level of risk tolerance, then you should be able to withstand a short-term market slump. If that's the case, do nothing. Sit on your hands and wait for markets to recover.

But if you've found yourself worried by what looks like an excessive loss in recent market turmoil, it could be that you are taking more risk than you are realistically comfortable with. Or it could be that you're withdrawing too much from your investments compared to the return they are making (e.g., if you're drawing down some of your money in retirement).

If that's the case, you may need to reduce what you're taking out—or rethink your investment strategy. You may want to rebalance your portfolio, perhaps by scaling back riskier equities in favor of bonds or cash. Speak to a professional for help creating a balanced portfolio.

While there's no escaping individual stock declines—or even a bear market—preparing your portfolio in advance can help you avoid big losses. Consider keeping some cash in reserve so you can buy when prices fall, and make sure you are properly diversified with a good spread of investments. This will help smooth your returns when markets are challenging.

 

Talk to an expert

If you've got a proactive wealth manager or financial advisor, chances are they'll already have been in touch to talk to you about recent market movements and how they are handling your portfolio. But if not, why not call them to touch base?

If you self-manage your investments, now may be a good time to book some time with a professional wealth manager for a sense check, and to make sure the way you are invested is suitable for the current market environment, your appetite for loss, and your financial goals.

We are here to help. Talk to your Synovus financial advisor today.

Important disclosure information

Diversification does not ensure against loss.

This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.

  1. Sims, Tom; Withers, Iain; Henry, David, “Global Finance Grapples With Ukraine Crisis As Shares Slump", Reuters.com. Published February 24, 2022, accessed March 30, 2022. Back
  2. Adinarayan, Thyagaraju, “Nasdaq Index Poised For Worst January In Its 50-Year Existence", Bloomberg.com Published January 31, 2022, accessed March 30, 2022. Back
  3. Lauricella, Tom, “3 Charts That Show Why Investors Should Stay the Course Throughout Market Turmoil," Morningstar. Published March 16, 2020, accessed March 30, 2022. Back