What to Do When the Market Falls: Building a Drawdown Plan Before You Need It

Every investor accepts in principle that markets fall. Very few decide in advance what they will do when it happens, which is why the average investor’s returns trail the funds they own. Knowing what to do when the market falls is not about predicting the next decline or being braver than everyone else. It is about writing down your decisions while you are calm, so that the version of you reading red headlines at 7am has instructions to follow rather than choices to make. This guide covers the pattern of past declines, why behavioural biases bite hardest at the bottom, and how to build a drawdown plan before you need one.

Key Takeaways

Question	Short, Practical Answer
How often do markets fall?	Declines of 10% have historically been roughly annual events. Larger falls are less frequent but recurring.
Should I sell and buy back lower?	It requires being right twice, and the best days cluster inside the worst periods.
What actually helps?	A written plan made in advance, a cash buffer, and continuing your regular contributions.
When is selling reasonable?	When your circumstances or your original thesis changed, not because the price fell.
Biggest behavioural trap?	Loss aversion. A fall feels roughly twice as intense as an equivalent gain feels good.
What should I do first?	Nothing, for at least a day. Most damage is done in the first 48 hours of panic.

1. Falls Are the Price of Admission, Not a Malfunction

Market declines are not evidence that something has broken. They are the mechanism by which equities generate a return premium in the first place. If shares delivered high returns without periodic terrifying falls, everyone would own only shares and the returns would be competed down to the level of cash.

The historical pattern of broad equity markets is worth internalising as approximate shape rather than precise numbers:

• Falls of around 5% happen several times in a typical year and barely register in hindsight.
• Falls of 10% or more have historically occurred roughly once a year on average, though clustered rather than evenly spaced.
• Falls of 20% or more have arrived every few years, and are the ones that get names.
• Falls of 40% or more are rare, perhaps a couple of times in an investing lifetime, and are the ones that define whether an investor stays invested.

Recoveries have historically followed all of them, though the timing has varied from months to years. This is a description of what has happened, not a promise about what will. But it does mean that treating each decline as unprecedented is almost always factually wrong.

The decline is not the risk. Selling into the decline and not getting back in is the risk. Those are entirely different problems with entirely different solutions.

2. Why Your Brain Works Against You

Three well-documented biases do most of the damage, and knowing their names genuinely helps you catch them.

Loss aversion

Research in behavioural finance consistently finds that losses feel roughly twice as powerful as equivalent gains. A 20% fall does not feel like the mirror image of a 20% rise. It feels considerably worse, which is why the urge to act is so much stronger on the way down.

Recency bias

Whatever has just happened feels like what will keep happening. After three down weeks, further falls feel inevitable. This is precisely why investors sell near bottoms: the extrapolation feels like analysis.

Action bias

Doing something feels responsible. Watching your portfolio fall while doing nothing feels negligent, even when doing nothing is the correct and considered decision. Naming this bias is useful because it lets you reframe inaction as the deliberate execution of a plan.

Add to these the modern amplifier: a phone that shows you a red number whenever you unlock it, and a news cycle that is commercially rewarded for making a normal correction sound like a systemic crisis.

3. The Timing Problem in One Paragraph

Selling to avoid a decline requires two correct decisions: when to get out, and when to get back in. The second is far harder, because you have to buy while the news is still terrible and prices are still falling. Investors who exit rarely re-enter until markets have already recovered substantially, which converts a temporary paper loss into a permanent realised one.

The reason this matters so much is that the strongest single days cluster inside the worst periods. Sharp rallies happen in the middle of bear markets, often within days of the largest falls, because that is when sentiment is most stretched. Being out of the market during a handful of those days has historically reduced long-run returns dramatically. You cannot reliably avoid the worst days without also missing the best ones, because they occupy the same few weeks.

4. Write the Plan Before You Need It

The single most useful thing you can do is write an investment policy note for yourself, one page, while markets are calm. It should answer:

• What am I invested for, and when do I need the money? The date matters more than the amount.
• What is my target allocation? Written down as percentages, so drift is measurable.
• What will I do if my portfolio falls 20%? Write the actual action: continue contributions, rebalance, do nothing.
• What will I do if it falls 40%? Answer this now, because you will not answer it well later.
• What are my genuine sell triggers? Changes in the investment case or in your own circumstances, never price alone.
• How often will I check my portfolio? Deciding this in advance removes an enormous amount of unnecessary anxiety.

Sign it and date it. During a decline, read it before you do anything. The point is not that your calm self is smarter, it is that your calm self is working with the same facts and none of the fear.

5. The Cash Buffer Does More Than It Looks

An emergency fund of several months of expenses, held in cash outside your investments, is usually framed as protection against job loss. Its more important function for investors is different: it means you are never a forced seller.

Almost every genuinely bad investing outcome involves being made to sell at the worst possible time. Having cash means a market fall stays an inconvenience on a screen rather than an event that dictates your decisions. It converts a real risk, permanent capital loss, into a temporary one, unrealised paper loss.

The same logic applies to leverage. Borrowed money removes your ability to wait, and waiting is the main advantage a private investor has over almost everyone else in the market.

6. What to Actually Do During a Decline

In descending order of usefulness:

Keep contributing

If you invest regularly, a falling market means your standing order buys more units at lower prices. This is the mechanism doing exactly what it was designed to do, and stopping contributions during a decline forfeits the main structural advantage of regular investing.

Rebalance, if the bands say so

A significant equity fall pushes your allocation below target, so rebalancing means buying equities at lower prices. It is uncomfortable and mechanically sound. Follow the threshold rules you set in advance rather than improvising, as covered in our guide to rebalancing without overtrading.

Harvest losses where it is genuinely useful

In a taxable account, realising losses on holdings you no longer want can create allowances against future gains. Mind the 30-day rule, and do it because the position no longer fits, not as a disguise for panic selling.

Review your thesis, calmly and in writing

Ask whether anything has actually changed about why you own each holding. Sometimes the answer is yes, and selling is correct. The discipline is requiring yourself to state the reason in a sentence that does not contain the word “falling”.

Reduce how often you look

Checking a volatile portfolio daily maximises the number of times you experience a loss, since short intervals are close to a coin flip while long intervals have historically trended upward. Less frequent checking is not denial. It is matching your observation window to your time horizon.

7. When Selling Is the Right Answer

None of this is an argument for never selling. There are legitimate reasons, and they share a common feature: none of them is the price falling.

• Your circumstances changed. You need the money sooner than planned, or your income became less secure.
• The investment case broke. The specific reason you bought a holding is no longer true.
• Your allocation is off target. Rebalancing sells whatever has become overweight, in either direction.
• You were taking more risk than you can live with. Discovering this during a fall is genuine information, though the right response is usually a gradual, planned reduction once conditions stabilise rather than a wholesale exit at the low.

If your reason for selling would still make sense written down and read back to you in five years, it is probably a real reason. If it only makes sense today, it is probably fear.

8. How InvestInsight Helps You Hold Your Nerve

Most panic is a framing problem. A broker app showing today’s change in red, in isolation, is optimised to produce exactly the emotion that leads to bad decisions.

InvestInsight’s portfolio tracker changes the frame. Because it holds your full history across every account, you can look at a five-year or all-time performance chart rather than today’s number, and a current decline appears where it belongs, as one feature of a longer line. Seeing previous drawdowns on the same chart, including how they looked at the time and what followed, is a far more useful perspective than any reassurance.

Your target allocation view tells you whether a fall has actually pushed you outside your bands, converting a vague sense that you should do something into a specific, rules-based answer, which is frequently no. The dividend tracker provides another anchor: dividend income from a diversified portfolio typically falls far less than prices do, and watching income continue while prices fall is a concrete reminder that you own claims on operating businesses rather than numbers on a chart.

Price alerts also let you set the levels that matter to you in advance, so you are responding to your own thresholds rather than to a news headline. And if watching others helps, social investing shows real portfolios going through the same conditions, which is a healthier reference point than a feed of hot takes, provided you treat it as context rather than instruction.

9. Common Mistakes to Avoid

• Selling everything to “wait for clarity”. Clarity arrives only after prices have already recovered.
• Stopping regular contributions. This removes the one advantage a decline offers you.
• Checking your portfolio constantly. It raises anxiety and lowers decision quality.
• Making new plans mid-crisis. Strategy decisions made while frightened are usually reversed later at a cost.
• Buying the whole cash buffer at the first 10% fall. If you intend to deploy cash, stage it, because you will not identify the bottom.
• Judging yourself on the outcome rather than the decision. A sound process can still be followed by another bad year.

Conclusion

Knowing what to do when the market falls comes down to a single principle: decide in advance, then execute rather than deliberate. Declines are routine, recoveries have historically followed them, and the greatest danger to a long-term investor is not the fall itself but the permanent damage caused by reacting to it.

Write your one-page plan now. Hold a cash buffer so you are never forced to sell. Keep contributing, rebalance by your rules, and reserve selling for reasons that have nothing to do with the price. Then check less often, because the next fall is coming, and the only useful preparation is the kind you make before it arrives. If a longer view helps you hold that line, InvestInsight’s portfolio tracker puts today’s number back where it belongs, in the context of everything that came before it.

Further reading

Historical market patterns describe the past. They are useful context and not a forecast, and every decline feels different while it is happening.

• Investopedia: behavioural finance
• Investopedia: market corrections
• Investopedia: the psychology of loss

This article is for general information only and does not constitute financial advice. All figures are illustrative and historical patterns are not reliable indicators of future results. Consider your own circumstances or speak to a qualified adviser before making investment decisions.