When markets fall, here’s what to avoid doing

When stock markets become more volatile, such as following the outbreak of conflict in the Middle East, it’s important to keep a cool head and take a long view rather than making rash decisions.

• Invest with ii: ​​Top ISA Funds | Open a Managed ISA | Transfer an ISA

Although the strikes won’t have come as a total surprise to investors given the build-up of America’s military presence in the Middle East, and fruitless negotiations over Iran’s uranium enrichment programme, the attacks sent markets into reverse and the price of oil surging. This in turn has possible implications for inflation, sparking fears of a resurgence which will impact central bank interest rate decisions.

There are many unknowns, not least the duration of this conflict or how long market volatility will play out for. 

Below, we offer some quick tips on what to do, and what to avoid doing, when stock markets fall sharply in a short space of time.

Don’t panic, and think long term

As history shows, for those willing to take a long-term perspective, sharp dips end up being a mere footnote in the grand scheme of things.

During times of stock market turbulence, it’s worth remembering that volatility is part of the deal when investing in equities. It’s the price investors pay for the fact that, over the long run, putting money into shares rather than leaving it in cash yields greater rewards.

According to Barclays’ Equity Gilt Study 2025, UK stocks have on average returned 2.9% a year in real (inflation-adjusted) terms over 20 years. In contrast, cash has lost 1.8%. US equities have fared better, up by 6.8% a year over the same period.

Moreover, history shows that stock markets do recover from sharp falls. Data from fund firm Mirabaud Group reveals that historically, it has taken the S&P 500 index an average of 19 months to recover from a fall of 20% or more (which is classed as a bear market).

For those concerned that they may panic-sell when markets fall on bad news, it’s well worth considering drip-feeding money into the market. A regular plan, involving investing at the start of every month, for example, does away with the risk that you might put all your cash into the market just before a nasty dip.

This strategy benefits from what is known as pound-cost averaging. When stock markets fall, the regular investment purchases more shares or fund units. Conversely, when stock markets rise, fewer shares and fund units are bought.

• The Analyst: defence – how to play the new tech sector
• Gold, silver and defence: reasons to be bullish and bearish
• Sign up to our free newsletter for share, fund and trust ideas, and the latest news and analysis

Diversify, diversify, diversify

While it doesn’t sound very exciting, maintaining a balanced and well-diversified portfolio is the best way to ride out short-term market falls.

Diversification involves having a mix of investment types, primarily shares, bonds and commercial property. Diversification can also be achieved through mixing large and small companies, having a spread of sectors and regions, and by having exposure to different investment styles, such as growth and value. Allocating to alternatives, such as infrastructure, private equity and commodities, can also improve diversification.

The theory is that different types of investments are unlikely to all outperform or underperform at the same time, which reduces the volatility of your overall portfolio. A mixed investment approach gives a portfolio ample opportunity to grow, while guarding against short-term volatility.  

Moreover, there are certain defensive investments or assets that investors can look to own. Among the options are gold, inflation-linked bonds, companies in defensive industries, and firms with plenty of pricing power. 

Three wealth preservation investment trusts that have consistently delivered in terms of protecting capital during periods of stock market weakness are Capital Gearing (LSE:CGT), Personal Assets (LSE:PNL), and Ruffer Investment Company (LSE:RICA). Each has a low weighting to shares and plenty of defensive armoury, such as low-risk, inflation-linked bonds.

Have some cash ready to invest

Stock market volatility also brings opportunities. It is worth considering keeping a small part of your portfolio in cash, or be ready to add some through new ISA or SIPP contributions. Having cash ready to invest means you are positioned to act quickly, as and when the next market sell-off occurs.

Cash could be held in a money market fund, with yields typically just under 4% at present.

For those looking to make use of their remaining ISA allowance ahead of tax year end on 5 April, a money market fund could be the ideal place to park any money until a decision is made on what to invest in.

• The highest-yielding money market funds to park your cash in
• Fund Spotlight: a port in a storm for cautious investors

Is it a bubble or normal ups and downs?

As mentioned, declines are part of the normal ups and downs of investing and stock markets occasionally depart from their long-term upward trajectory.

However, sometimes stock valuations race so far ahead of reality that they slump dramatically, or take a very long time to recover – a so-called bubble.

Perhaps the clearest example of this over the past 40 years was the bubble in Japanese stocks and the country’s property market, which burst in the early 1990s. It took 34 years – until February 2024 – for Japan’s Nikkei 225 index to recover.

As ever, the key to mitigate the risk of bubbles is to be diversified rather than overexposed to a certain region, sector or theme.  

Article first published 3 April 2025. Updated on 4 March 2026.