Markets fall. They always have, and they will again. The question is not whether you will experience a downturn, but how you will respond when it arrives.
Most investors know, intellectually, that downturns are temporary. Most investors also know, from experience, that this knowledge provides little comfort when the portfolio is down 25% and headlines are screaming crisis. The gap between knowing and doing is where outcomes are made or lost.
This article provides a structured, step-by-step behaviour plan for navigating market downturns. The plan is designed to be written before volatility arrives and followed during it. The best time to prepare is when markets are calm. The worst time to make decisions is when they are not.
This is general educational information, not personal financial advice.
Why Downturns Feel Worse Than They Are#
A 30% decline on paper is not pleasant. But the psychological experience of a downturn is often more damaging than the financial reality.
Several factors amplify the emotional intensity:
Loss aversion. Research in behavioural economics shows that losses feel approximately twice as painful as equivalent gains feel good.¹ A $10,000 loss produces more distress than a $10,000 gain produces satisfaction. This asymmetry is deeply wired and cannot be reasoned away.
Uncertainty. During downturns, no one knows how far markets will fall or how long the decline will last. The absence of a clear endpoint makes the experience harder to tolerate. The brain prefers known bad outcomes to unknown ones.
Social reinforcement. During market stress, news coverage intensifies, social media amplifies fear, and conversations turn to losses. The constant exposure reinforces the sense that something unprecedented is happening, even when the decline is within historical norms.
Myopic focus. The more frequently you check your portfolio, the more you experience the decline. Checking daily transforms a single drawdown into dozens of separate loss experiences, each triggering its own emotional response.
Understanding these dynamics does not eliminate them. It does, however, explain why the urge to act feels so compelling and why that urge is often counterproductive.
The Core Principle: Do Less, Not More#
The most effective response to a market downturn is often the most difficult: do less.
Research on investor behaviour consistently shows that activity during downturns tends to destroy value.² Investors who sell during crashes lock in losses and miss the recoveries that follow. The best days in markets tend to cluster around the worst days.³ Missing even a handful of recovery days can significantly reduce long-term returns.
The instinct to "do something" is understandable. Inaction feels passive when danger signals are firing. But in the context of a long-term investment strategy, inaction is not passive. It is the plan working as intended.
This does not mean ignoring problems or avoiding all engagement. It means distinguishing between actions that serve your long-term goals and actions that serve your short-term emotional state.
Step-by-Step Behaviour Plan#
The following plan is designed to be written in advance and followed during a downturn. Each step creates a pause between the emotional trigger and any action.
Step 1: Pause Before Doing Anything#
When you feel the urge to make changes, stop. Do not log in to your brokerage account. Do not check prices. Do not make any decisions.
The pause serves a specific function: it interrupts the automatic reaction pathway. Panic selling typically happens quickly, driven by the need to stop the pain. Creating even a small delay allows the rational brain time to engage.
Practical techniques for pausing:
- Set a 48-hour rule: no investment decisions for at least 48 hours after the urge arises.
- Remove investing apps from your phone's home screen during volatile periods.
- Turn off price alerts and portfolio notifications.
The pause is not about suppressing emotions. It is about preventing emotions from directly controlling actions.
Step 2: Review Your Time Horizon#
Ask yourself: when do I actually need this money?
If the answer is years or decades away, the current decline is a temporary event within a longer journey. Markets have recovered from every historical downturn; the only question is timing. For long-horizon investors, volatility is the expected cost of higher long-term returns.
If the answer is soon (within the next few years), the situation is more complex. Money needed in the short term should not typically be exposed to high volatility. If short-term funds are currently invested in volatile assets, that is a planning issue to address, but selling during a downturn may still lock in the worst outcome.
Write your time horizon somewhere visible. During a downturn, perspective narrows. Seeing the actual numbers (years, not days) can restore context.
Step 3: Revisit Your Goals#
What is this money for?
Reconnecting with the purpose behind the investment can shift focus from short-term pain to long-term direction. The goal has not changed. The market has moved, but the reason for investing has not.
If the goal is retirement in 20 years, a 30% decline does not mean the goal is unreachable. It means the path will have fluctuations. If the goal is a house deposit in 18 months, the decline is more relevant, and the positioning may need adjustment once markets stabilise.
Goals provide an anchor. Without them, every price movement feels equally significant.
Step 4: Consult Your Written Rules#
If you have pre-written investment rules, now is the time to read them.
Written rules created during calm periods represent the thinking of a less emotional version of yourself. They provide a reference point that is not distorted by the current environment.
Examples of written rules that serve well during downturns:
- "I will not sell any holding within 12 months of a market decline exceeding 20%."
- "I will continue my regular contributions regardless of market conditions."
- "I will not check my portfolio more than once per month."
- "Before making any change, I will re-read this document."
If you do not have written rules, the downturn is a reminder of why they matter. After the volatility passes, creating them becomes a priority.
Step 5: Reduce Noise Inputs#
The volume of information during a downturn is inversely related to its usefulness. Financial news, social media, and casual conversation all amplify without informing.
Reducing inputs is not denial. It is information management. The long-term investor does not need minute-by-minute updates on prices that will matter only in years. The emotional cost of constant exposure is real; the informational value is minimal.
Practical noise reduction:
- Mute or unfollow financial commentary accounts during volatile periods.
- Avoid checking news headlines related to markets.
- Limit conversations about portfolio losses; they reinforce the sense of crisis.
- Set specific times for any portfolio review (weekly or monthly) rather than constant checking.
The goal is to match the frequency of information consumption to the time horizon of the investment.
Step 6: Continue Contributions (If Appropriate)#
If you have automatic contributions in place, let them continue.
Buying during a downturn means purchasing at lower prices. This is mathematically advantageous, even though it feels psychologically wrong. The discomfort of investing while prices fall is the same discomfort that prevents most people from capturing the benefit.
Automatic contributions remove the decision from the moment. The money moves without requiring you to actively choose to invest during a crisis. This is by design.
If contributions are manual, consider whether continuing makes sense given your circumstances. For long-horizon investors, maintaining or increasing contributions during downturns has historically improved outcomes.⁴
Step 7: Seek Support If Needed#
For some investors, following a written plan is sufficient. For others, the emotional intensity of a downturn requires additional support.
Options include:
- Talking to a licensed financial adviser who can provide perspective and accountability.
- Discussing concerns with a trusted person who understands your goals and time horizon.
- Re-reading educational materials about market history and recovery patterns.
Seeking support is not a sign of weakness. It is a recognition that investing involves emotions, and emotions benefit from external perspective.
Write the Plan Before You Need It#
The time to create a downturn plan is not during a downturn. It is now, while markets are stable and thinking is clear.
A written plan has several advantages:
- It captures your best thinking, undistorted by fear.
- It provides a concrete reference during periods of high emotion.
- It creates commitment, making deviation feel like breaking a promise to yourself.
The plan does not need to be elaborate. A single page with the key steps, your time horizon, your goals, and your rules is sufficient. The format matters less than the act of writing it.
Keep the plan somewhere accessible. During a downturn, you need to be able to find it without searching.
What This Plan Does Not Do#
This plan does not guarantee that following it will produce the best possible outcome. Markets are uncertain, and no process can eliminate that uncertainty.
It also does not address situations where a review is genuinely warranted (major life changes, shifts in time horizon or capacity). Those situations require different thinking. The plan is specifically designed for the common case: a market decline that triggers an emotional response but does not change the underlying circumstances.
The goal of the plan is to reduce the probability of making a reactive decision that you will later regret. It improves the odds, not guarantees the outcome.
Summary#
Market downturns feel worse than they are because of loss aversion, uncertainty, social reinforcement, and frequent checking. The most effective response is often to do less, not more, as activity during downturns tends to destroy value. A step-by-step behaviour plan includes: pausing before acting, reviewing your time horizon, revisiting your goals, consulting written rules, reducing noise inputs, continuing contributions if appropriate, and seeking support if needed. The plan is most effective when written during calm periods and followed during volatile ones. No plan eliminates uncertainty, but a structured process reduces the likelihood of reactive decisions that lock in losses.
Sources#
- Kahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econometrica, 47(2), 263-291. https://doi.org/10.2307/1914185
- Barber, B. M., & Odean, T. (2000). Trading is hazardous to your wealth: The common stock investment performance of individual investors. The Journal of Finance, 55(2), 773-806. https://doi.org/10.1111/0022-1082.00226
- J.P. Morgan Asset Management. (2024). Guide to the markets. https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/guide-to-the-markets/
- Vanguard. (2023). Dollar-cost averaging: Investing made easier. https://www.vanguard.com.au/personal/learn/smart-investing/investment-strategies/dollar-cost-averaging