When markets fall, here’s what to avoid doing
We offer pointers of what to do, and what to avoid doing, when stock markets fall.
3rd April 2025 11:18
When stock markets become more volatile, such as in response to US President Donald Trump’s tariffs, it’s important to keep a cool head and take the long view rather than making rash decisions.
Since the start of 2025, uncertainty over the specifics of Trump’s tariffs has played a big part in US stock markets having a first quarter to forget, resulting in falls of 1.3%, 4.6% and 10.4% for the Dow Jones, S&P 500 and Nasdaq respectively.
Another key driver has been valuations. US stock markets enjoyed strong returns in both 2023 and 2024, with those gains heavily influenced by strong gains from the world’s biggest technology companies, which were boosted by the huge potential of artificial intelligence to disrupt various industries.
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Trump’s ‘Liberation Day’ (2 April 2025) announcement on tariffs across the globe delivered much-needed clarity on his plans. UK companies were hit with 10% tariffs, the European Union 20%, while Asian countries have been handed significantly higher tariffs, including 54% for China (which includes earlier tariffs), 46% for Vietnam, 36% for Thailand and 32% for Taiwan.
In the days and weeks to come, governments across the globe are expected to retaliate with their own countermeasures.
Michael Field, chief equity strategist at Morningstar, says: “The consumer goods, healthcare and industrials sectors will be among the sectors worst affected by the new measures. The extent to which we have not yet reflected in our cash flow forecasts, nor our fair value estimates.
“Worse possibly, will be the response from the EU, and the likely counter-response by the US government. All of which will ratchet up the damage to exporting and importing businesses. The coming weeks will be telling, whether this event has the potential to reshape global trade, or whether, as many have predicted, there is a deal to be done.”
Below, we briefly offer some tips on what to do, and what to avoid doing, when stock markets fall sharply in a short space of time.
Don’t panic, and think long term
As history shows, for those willing to take a long-term perspective, sharp dips end up being a mere footnote in the grand scheme of things. At times of stock market turbulence, it is worth remembering that volatility is part of the deal in investing in equities. It is the price investors pay for the fact that, over the long run, putting money into shares rather than leaving it in cash will yield greater rewards.
According to Barclays’ Equity Gilt Study 2024, UK stocks have on average returned 3.1% a year in real (inflation-adjusted) terms over 20 years. In contrast, cash has lost 1.8%. US equities have fared better, up by 6.4% a year over the same period.
Moreover, the history books show that stock markets do recover from sharp falls. Data from fund firm Mirabaud Group shows that historically, it has taken the S&P 500 index an average of 19 months to recover from a fall of 20% or more (which is classed as a bear market).
For those concerned that they may panic-sell when markets fall on bad news, it is well worth considering drip-feeding money into the market. A regular plan, involving investing at the start of every month, for example, does away with the risk that you might put all your cash into the market just before a nasty dip.
This strategy benefits from what is known as pound-cost averaging. When stock markets fall, the regular investment purchases more shares or fund units. Conversely, when stock markets rise, fewer shares and fund units are bought.
Diversify, diversify, diversify
While it doesn’t sound very exciting, maintaining a balanced and well-diversified portfolio is the best way to ride out short-term market falls.
Diversification involves having a mix of investment types, primarily shares, bonds and commercial property. Diversification can also be achieved through mixing large and small companies, having a spread of sectors and regions, and by having exposure to different investment styles, such as growth and value. Allocating to alternatives, such as infrastructure, private equity and commodities, can also improve diversification.
The theory is that different types of investments are unlikely to all outperform or underperform at the same time, which reduces the volatility of your overall portfolio. A mixed investment approach gives a portfolio ample opportunity to grow, while guarding against short-term volatility.
Our recent feature, “How investors can hedge against Trump’s trade wars”, highlights some of the ways investors can add defensive ballast to portfolios. Among the options are gold and short-dated bonds.
Have some cash ready to invest
Stock market volatility also brings opportunities. It is worth considering keeping a small part of your portfolio in cash, or be ready to add some through new ISA or SIPP contributions. Having cash ready to invest means you are positioned to act quickly, as and when the next market sell-off occurs.
Cash could be held in a money market fund, with yields typically around 4.5% at present.
For those looking to make use of their remaining ISA allowance ahead of tax year end on 5 April, a money market fund could be the ideal place to park any money until a decision is made on what to invest in.
- Watch our video: the case for investing in this part of US stock market
Is it a bubble or normal ups and downs?
As mentioned, declines are part of the normal ups and downs of investing and stock markets occasionally depart from their long-term upward trajectory.
However, sometimes stock valuations race so far ahead of reality that they slump dramatically, or take a very long time to recover – a so-called bubble.
Perhaps the clearest example of this over the past 40 years was the bubble in Japanese stocks and the country’s property market, which burst in the early 1990s. It took 34 years – until February 2024 – for Japan’s Nikkei 225 index to recover and hit a new record high.
As ever, the key to mitigate the risk of bubbles is to be diversified rather than overexposed to a certain region, sector or theme.
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