Last Updated on May 20, 2025
Overview – Dealing With Down Markets
If there’s one thing most investors hate seeing, it’s watching financial markets go down. Whether they’re greatly emotional or cool as ice, many investors will react to varying degrees whenever they see markets plunge into the red.
As the saying goes, “Everything that goes up must come down”. Even financial markets that experience robust growth over a sustained period will occasionally experience declines. Intermittent drops in financial markets have occurred since their inception and will continue to occur well into the future – this is the reality every investor must learn to live with.
Down markets can present windows of opportunity or serve as an early warning for bigger developments in the future, so knowing how to properly respond to them is an important skill to have.
To help narrow our scope, the primary “market” we will focus on in this article will be equity (i.e., stock) markets, and when they “go down” refers to when major market indices decline in value.
Markets Can Decline for Several Reasons, so Find Out What You’re Dealing With
One of the observations that investors will repeatedly experience is that markets can decline for any number of reasons. Whether it’s some rumours spreading throughout the business community, weaker-than-expected economic data has just been released, political developments, or the anticipation of a recession, decline can occur in the blink of an eye.
So, whenever investors are faced with slumping markets, one of the first things they’ll want to discern is whether they’re dealing with something that’s only temporary or is a precursor to something bigger down the road.
Empirically speaking, many times these bouts of decline are just episodes of volatility, something we’ve discussed before on how to navigate. Most of the time, this volatility will usually subside, and market indices will regain whatever losses they suffered. Investors usually don’t need to do much, if at all, when dealing with this kind of market activity.
However, there will be times when a decline in the markets is based on legitimate concerns and is a forewarning of future adverse events. The problem with this latter scenario is that this decline happens over an extended period, whether it’s a few weeks or even a few years, and is a slow, gradual decline.
These long, “slow-burning” types of market declines are difficult to spot because of their subtlety; the decline happens slowly, yet adds up substantially over time. Because of this, these are the ones that will require an investor’s full, serious attention because of their implications.
Regardless of what kind of down markets investors encounter, there will be times when rare opportunities present themselves, and times when investors will want to seriously think twice before doing anything.
Down Markets Can Present Some Excellent Acquisition Opportunities
One of the most popular investment adages is to “buy the dip”, meaning to purchase investments (usually equities) when faced with bouts of volatility/market decline.
Although “buying the dip” isn’t always sensible, it does have some merit to it, and if done properly, can be hugely beneficial for astute investors.
Declining markets are similar to a receding tide; that is, every boat in the water is lowered regardless of its size and build quality. Similarly, when stock markets decline, many companies experience declines in share price, whether they’re small companies with relatively weak financial performance or large, established enterprises with a global presence and strong underlying business fundamentals.
However, just because inherently strong companies experience a sharp decline in share price doesn’t mean their investment merit has diminished. Rather, investors who can successfully identify these temporarily affected, yet inherently strong, enterprises have a chance to add some very strong investments to their portfolios at a reasonable price.
For example, many blue-chip stocks command extremely high stock prices, which can be attributed to their popularity and strong investment merit, making them out of reach for many investors. However, down markets may give investors a chance to scoop up these blue chips because they decline to a price that more investors are willing to buy them at.
While buying the dip may be a smart move during down markets, this is only true to a certain degree. When surrounded by nothing but stocks that are “on sale”, everything looks to be worth buying. This overly simplistic thinking can prove to be a very costly mistake.
The major assumption behind buying the dip is that a company’s stock is currently trading at a discount, even though its underlying strengths remain unchanged. Therefore, the hope is that these temporarily mispriced stocks will eventually return to their original, higher price from before.
However, there can be instances when a company’s share price may suddenly decline and never recover to what it was previously, failing to deliver the returns investors were expecting. Choosing to indiscriminately “buy the dip” can therefore end up being disastrous.
Resisting the Urge to Sell, and Knowing When It’s Appropriate to Do So
Whether it’s short-lived volatility or a broad, sustained decline, one word that will be on many investors’ minds is “sell”. Choosing to sell in the face of down markets can either be a very foolish decision to make or a very prudent one; again, it depends on what investors are dealing with.
Stocks that experience a sharp, largely unexplained decline in share price usually don’t need to be sold because their decline is usually due to factors beyond their control (though not always). Chances are their underlying investment merit (or lack thereof) will more or less remain unchanged.
The real danger lies in gradual market declines due to deteriorating economic/business conditions, leading to a gradual decline in individual stock prices. Investors in this situation may find themselves holding on to “sinking ship” investments, and if they fail to identify them quickly, it can make it difficult to cut their losses.
When faced with this situation, investors may want to consider selling certain equities they have to avoid suffering any major losses, assuming they have backed up their decision to sell with adequate analysis.
Knowing whether or not to sell is a big decision, and as such, should not be taken lightly. However, selling when it’s appropriate to do so may prove to be the smart choice as opposed to stubbornly holding on to certain equities that are not worth having.
Move Fast or Stay Still? A Delicate Balancing Act
Based on the type of down markets investors find themselves dealing with, they will always be hit with an age-old dilemma, and that is knowing when to take quick, decisive action or to simply wait things out.
Throughout this article, we’ve made it sound like a short-term decline in the markets requires minimal action, while a prolonged decline is the only time worth doing something. While this may be true in many cases, this is by no means a blanket generalization.
Knowing when to take swift, decisive action is just as important as knowing when to do nothing. Do too much and investors may bring more trouble upon themselves than anticipated; do too little and investors may end up dealing with massive headaches that could’ve otherwise been averted.
Therefore, taking action in the face of down markets is a delicate balancing act.
Most investors will feel inclined to do something whenever they see market indices in the red, but knowing how much action to take, and when, won’t always be an easy call to make. This will ultimately depend on the specific circumstances investors find themselves in and the extent to which down markets affect them.
Wrapping Up
Many investors dread seeing market indices go down, signalling a broad market slowdown is underway, but how investors approach this inevitable, repeating occurrence will make all the difference.
It can be argued that, most of the time, whenever markets post losses, it is usually a short-term phenomenon that doesn’t need much, if any, action. However, gradual, consistent declines in major market indices over an extended period will warrant an investor’s attention, yet will be more difficult to spot.
Down markets can present some excellent buying opportunities, and assuming investors act diligently, they can scoop up some very attractive investments that are currently selling at steep discounts. Conversely, some investors are immediately tempted to start selling whenever they see markets start to decline, but it would be wise to take a step back and carefully think twice before making this decision.
Investors faced with down markets must deal with finding a delicate balance of how much action they need to take, if any, to avoid any potential adverse effects on their portfolios.
