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Market corrections — when a stock index declines by at least 10% from a recent peak — are nerve-wracking, especially for investors who are new or haven’t experienced them before. 

Even experienced investors have trouble curbing the emotional response to a sudden drop in stock prices.

But corrections are not uncommon. Over the 20 years from 2002 to 2021, a decline of at least 10% occurred in 10 out of 20 years, or half of the time. 

Whether it be negative news, economic concerns, geopolitical events or other factors that fuel these price pullbacks, market corrections often help to recalibrate overvalued assets — creating potential buying opportunities for long-term investors. Because, historically, markets have always recovered from corrections. However, the timeframe for recovery can vary widely. 

Corrections can test your resolve as an investor, so here are three things to avoid during a market sell-off and what to do instead.

1. Panic sell and possibly contribute to a recession

Selling in a panic during a market downturn is not a good idea for several reasons: 

• It’s often irrational and driven by fear instead of aligning with your long-term financial goals
• You lock in losses that have occurred due to the market decline
• Historically, markets have always recovered from corrections and bear markets, albeit sometimes over extended periods. 

Additionally, it’s not just your portfolio that you need to worry about. When enough investors panic sell, it can exacerbate sell-offs and intensify economic stress.

In 1929, investors fled stocks due to widespread panic and confidence loss after a period of speculative excess, deepening the recession and leading to a severe economic crisis that lasted for years.

In 2008, investors sold stocks out of fear and uncertainty that global governments would be unable to stabilize the financial system.

In 2020, as the coronavirus pandemic began to spread, economic uncertainty and its potential consequences triggered widespread panic, leading to a stock market crash.

While economists today are unaligned on whether we’re nearing a possible recession, Morningstar DBRS analysts noted that there’s a concern that the recent sell-off could become “a self-fulfilling prophecy” that would lead to a broader economic recession.

Wall Street’s ‘fear gauge’ spiked to its highest level since October 2020 during the recent global sell-off that saw the S&P 500 drop as much as 4.3% on August 5, 2024 (5,186.33), bringing it to a low of nearly 8.5% from its July 2024 high of 5,669.67. As of this writing, the S&P 500 has recovered around 3.1%. 

This isn’t to say that your investment actions will trigger a market crash. Even a market crash alone doesn’t necessarily cause recessions. But history has shown that widespread panic selling can intensify economic challenges.

Instead of panic selling during a market sell-off, stay calm, try not to look at your 401(k) losses

and focus on your long-term goals. Reassess your portfolio, continue investing regularly and look for buying opportunities.

2. Wait for the bottom

Timing the market — selling at the peak and buying at the bottom — is extremely difficult. Even professional investors often fail to time the market correctly. 

Attempting to wait for the bottom can lead to missing the market’s best days, which often occur shortly after the worst days. The S&P 500 jumped 2.3% on Thursday, August 8, 2024, for its best day since 2022, just a few days after recording its worst day in about two years.

According to Hartford Funds, 50% of the stock market’s best days occur during a bear market. And missing just a few of these recovery days can significantly impact long-term returns. Looking at the hypothetical returns of $10,000 invested in the S&P 500 between 1950 and 2023, your returns would have been slashed in half if you missed the market’s 10 best days. Missing the top 30 days could have reduced your returns by as much as 83%.​

Consider buying stocks as prices decline rather than trying to wait for the bottom. You’ll still be able to take advantage of lower prices and benefit from potential long-term gains as the market recovers while avoiding the uncomfortable feeling of a missed opportunity. A long-term, consistent investment strategy is typically more effective.

3. Stop investing entirely because the markets are crazy

It’s tempting to stop investing when markets are highly volatile or in decline, but this approach can be detrimental to your long-term financial goals. Stocks offer the greatest potential for growth over the long term, so throwing in the towel too soon and avoiding investing altogether is generally a bad idea.

Despite market volatility, it’s crucial to continue investing, particularly in times when shares are cheaper — market downturns often present opportunities to buy quality stocks at discounted prices. When markets are down, stock prices reflect a lower valuation, allowing you to acquire shares that may have been previously too expensive.

Historically, investors who continue to buy during downturns benefit from significant gains when the market eventually recovers. This strategy is especially important for retirement planning, where you can maximize these opportunities through your retirement accounts and the tax-deferred or tax-free growth they offer investors.

Maintaining a disciplined approach and continuing to invest during a sell-off aligns with a long-term strategy, allowing you to build wealth steadily despite short-term market volatility.

Bottom line

When the market is in a sell-off, it’s essential to remain focused on your long-term financial goals and resist the urge to make hasty, fear-driven decisions. Instead of panic selling, waiting for the bottom or halting investments altogether, maintain a disciplined approach by reassessing your portfolio, continuing to invest regularly and looking for buying opportunities.

Stay invested according to your individual financial goals, risk tolerance and time horizon.

History shows that markets tend to recover from downturns, and by staying invested, you can benefit from potential long-term gains while avoiding the pitfalls of trying to time the market or reacting emotionally to short-term volatility.

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