Why You Shouldn't Panic During Market Downturns

When the stock market tumbles, it's natural to feel uneasy. Everywhere you turn you see panic-inducing headlines about losses, the value of your portfolio likely dips, and your first instinct is you must do something to preserve your hard-earned money. However, if you're an average investor with long-term goals, panicking during a downturn might not be the best reaction. This article discusses why it’s important to stay calm when the stock market declines and how sticking to a long-term investment approach may be your smartest decision.

1. Market Volatility Is Normal

Volatility is the extent to which markets or individual investments move up or down in value over time, often due to economic trends, political events, or company-specific news. It’s a natural part of investing. While small day-to-day changes are expected, the bigger, more prolonged drops that tend to cause concern. These larger swings fall into two common categories: Market Corrections (a drop of 10% or more) and Bear Markets (decline of 20% or more).

Although large market downswings can be unsettling, they happen more often than you might think. Since the1950s, the S&P 500 has experienced a correction roughly every two years. The most important thing to keep in mind is that every market downturn throughout history has eventually been followed by a recovery and new highs.

2. Selling During a Downturn Can Impact Long-term Growth

Market declines often trigger the impulse to “cut losses” by selling. However, this reaction can lock in losses and make it more difficult to recover. Panic selling often results in selling at or near a low point and then missing out on the recovery when markets bounce back, often to higher points than before. Historically, some of the market’s strongest gains have occurred shortly after its steepest drops. If you're out of the market when those rebounds occur, you risk missing out on critical gains which could significantly reduce your long-term returns. While recovery may not be immediate, staying the course gives your investments the opportunity to recover over time.

3. The Market Has a Long-Term Upward Trend

Despite wars, recessions, pandemics, and political turmoil, the stock market has consistently demonstrated that over the long term, it trends upward.  The S&P 500 has averaged about a 10% annual return over the past century which includes major events such as the Great Depression, the 2008 financial crisis, and the COVID-19 pandemic. The key is to remain calm, be patient, and trust that a rebound will likely take place in the future.

4. Trust Your Financial Plan

One of the best ways to avoid panic during market downturns is to follow a well-thought-out, long-term financial plan that considers downturns can and will happen. Instead of reacting emotionally, focus on what you can control:

• Keep investing regularly (even during downturns).
• Stay informed about the markets but avoid letting headlines impact your financial decisions.
• Review and rebalance your allocation periodically. Remember, having a well-diversified portfolio can help you withstand volatility.

Market declines can feel unsettling in the moment, but history shows that patience and discipline will likely prevail. Some of the most successful investors aren't those trying to time the market, they are the ones who stay invested and trust their plan. So, when the market dips, take a deep breath, stay the course, and remind yourself: this too shall pass.

To speak with a professional who can provide personalized guidance and help you achieve your financial goals, visit fnbo.com/wealth.