#038: Most Investors Panic During Market Downturns. Are You One Of Them?

By: Ryan Greiser, CFP®

Read Time: 5 Minutes

Market downturns are opportunities, not disasters.

Unfortunately, many people panic during market downturns. This often leads to impulsive decisions like selling off investments at a loss, which can severely impact long-term financial goals.

I’m going to show you how to avoid this disaster.

Why Panic Selling Is a Mistake

Panic selling during a market dip is financial suicide.

It goes against the basic rule of successful investing: keep a long-term perspective. Morgan Housel, in a talk on episode 576 of the Tim Ferris Show, highlighted that the key to maximizing long-term returns is not about getting the highest short-term gains but achieving steady returns over time. He said, “The huge majority of the time, the answer is not earning the highest returns. It's what are the best returns that you can earn for the longest period of time?”

This shows the importance of patience and resilience, especially during market ups and downs.

Recent Market Events: A Lesson in Patience

On the morning of August 5, 2024, the stock market dropped sharply, causing widespread panic. A post on 𝕏 by @unusual_whales captured the mood:

Call your mother... and father... and lover.

Hurry. pic.twitter.com/oQ8wed5CBx

— unusual_whales (@unusual_whales) August 5, 2024

This tweet showed the fear that many investors felt. However, the very next day, the market bounced back.

Another post from @unusual_whales on August 6, 2024, humorously stated, 

Thank you for calling your mothers yesterday.

The market is now green. https://t.co/HXSdJtW6Vh pic.twitter.com/TCyEwGrZiu

— unusual_whales (@unusual_whales) August 6, 2024

These events revealed the difference between seasoned investors and beginners.

A report from Yahoo Finance noted that while retail investors panic sold $1 billion worth of stocks, institutions bought $14 billion worth. This highlights a key insight: seasoned investors often see market dips as buying opportunities, not as reasons to sell.

This difference in behavior is why the rich tend to get richer, as they capitalize on market changes rather than react to them emotionally.

Morgan Housel summed it up well in a tweet:

This is the biggest market decline since the last decline you don't remember or care about anymore.

— Morgan Housel (@morganhousel) August 2, 2024

This shows the cyclical nature of market downturns and the importance of the psychology around your money.

Why Standard Advice Often Falls Short

The first time I faced a major market downturn, I realized how little standard advice helped.

1. Diversify your portfolio.
2. Stay informed but detached.
3. Practice emotional discipline.
4. Have a long-term perspective.
5. Consult with a professional financial advisor.
6. Buy good investments and hold for a long time.

These are all solid pieces of advice, and you'll find them in every investment guide or from any advisor worth their salt. 

But let’s be honest—when the market is crashing and fear takes hold, these well-worn tips often fall flat.

In the heat of the moment, when your emotions are running high, it’s hard to remember and even harder to follow these academic recommendations.

The truth is, we all know that unexpected catastrophes will happen. The one guarantee in investing is that the market will throw you curveballs—unmitigated disasters that no one saw coming. 

So how can you increase the likelihood that you won’t react in a moment of panic, making the very decisions that could cripple you financially?

The 3-Question Framework I Rely On

Financial advisors can’t always save you; sometimes, you need your own framework.

Instead of relying solely on traditional advice, I like to ask myself three simple but powerful questions to keep my emotions in check and make the best decisions for myself and our clients:

1. What decision would the person I’m trying to become make?

This question pulls you out of the emotional turmoil of the moment and reminds you of your long-term goals. It’s about aligning today’s actions with the future you want to create. The person you're striving to become wouldn't panic-sell—they would see the bigger picture and make decisions accordingly.

2. What path is more difficult in the short term but better in the long term?

The easy choice is rarely the right one. This question forces you to consider the tough decisions that might hurt now but pay off later. It’s about choosing the path that may cause short-term discomfort but leads to long-term success.

3. What would I advise my best friend to do in this situation?

We often give better advice to others than we do to ourselves. This question helps you step outside your situation and look at it from a more objective perspective. If your best friend called you in a panic, what would you tell them to do? Likely, you'd advise them to stay calm, think long-term, and not make any rash decisions.

These questions help me cut through the noise and stay grounded, even when the market is anything but stable. They’re designed to increase the likelihood that, when panic sets in, you’ll avoid the financial pitfalls that come from making emotionally-driven decisions.

Conclusion

Unexpected market downturns are inevitable, but panic doesn’t have to be.

When the market gets rough, remember that the typical advice, while sound, might not always be enough to keep you steady. The one thing we can all count on is that the market will surprise us with unexpected catastrophes. The real challenge isn’t just knowing this but preparing yourself to respond in a way that protects your financial future.

Ask yourself these three questions to guide your decisions and keep your emotions in check. 

1. What decision would the person I’m trying to become make?
2. What path is more difficult in the short term but better in the long term?
3. What would I advise my best friend to do in this situation?

The answers will help you stay on course and make choices that align with your long-term financial goals, even when the unexpected happens.

Stay calm, think big, and let market downturns work for you.

See you next week, 

Ryan Greiser, CFP®