What Happens to My Investments if the Stock Market Falls?

Why do stock markets fall?

For all sorts of reasons.

Economic slowdowns.

Changes in interest rates.

Inflation.

Political uncertainty.

Wars.

Financial crises.

Company profits.

Changes in investor expectations.

And occasionally something happens that almost nobody had seriously planned for.

Markets are forward-looking.

Investors constantly reassess what companies and other assets might be worth based on the information available.

When expectations change, prices change.

Sometimes quickly.

How far can investments fall?

There isn't one number.

A relatively modest market correction and a major financial crisis are very different events.

Individual companies can fall dramatically.

Entire stock markets can also experience substantial declines.

And different types of investments can react differently during the same period.

That's why somebody telling you:

"The market fell 20%"

doesn't necessarily mean:

"Your investments fell 20%."

It depends what you own.

Steve's observation

When somebody rings me worried because:

"The stock market is down,"

my first question isn't:

"How far?"

It's:

"What are you actually invested in?"

Because knowing what's happening on the news doesn't automatically tell us what's happening to your financial plan.

If my investment falls, have I actually lost the money?

Your investment has genuinely fallen in value.

We shouldn't pretend otherwise.

But there is a difference between a fall in current value and selling at that lower value.

Imagine investing £50,000.

It subsequently falls to £40,000.

At that moment, your investment is worth £40,000.

If you sell it for £40,000, you've turned that lower valuation into the amount you receive.

If you remain invested, its future value could:

recover;

fall further;

remain around the same level;

or move in either direction over time.

There is no guarantee it will recover.

That's an important sentence.

A previous market recovery does not guarantee that your particular investment will recover in future.

Don't markets always recover eventually?

No.

We need to be careful here.

Broad investment markets have historically recovered from many significant falls.

But that doesn't mean:

every company recovers;

every investment recovers;

or:

every investor has enough time to wait for a recovery.

A company can fail permanently.

A sector can remain depressed for years.

An investment strategy can underperform.

And even if a market eventually recovers, that may not help somebody who needed the money halfway through the fall.

So:

"Markets always come back"

is not a sensible financial plan.

Your investment needs to be appropriate even though recovery cannot be guaranteed.

Why does diversification matter when markets fall?

Imagine your entire £100,000 is invested in one company.

That company experiences a serious problem.

Your financial outcome is heavily dependent on what happens next to that one business.

Now imagine your investment is spread across:

different companies;

different industries;

different countries;

and potentially different types of assets.

One investment performing badly may have less effect on the whole.

That's diversification.

The FCA explains that diversification reduces reliance on any single investment or market and can help smooth overall investment returns.

But here's the important bit:

Diversification does not guarantee that your portfolio won't fall.

During significant market stress, many investments can decline at the same time.

Diversification manages risk.

It doesn't abolish it.

Should I sell when markets fall?

There isn't a universal answer.

And this is exactly where a general educational guide needs to be careful.

Selling may be appropriate in some circumstances.

Remaining invested may be appropriate in others.

What isn't sensible is assuming:

"The market has fallen, therefore I must sell."

Before making a decision, ask:

Has my objective changed?

Has my timeframe changed?

Has my financial position changed?

Has something fundamentally changed about the investment itself?

Was the investment appropriate in the first place?

Or am I simply frightened because the number has gone down?

Those are different situations.

What if I sell and buy back when things improve?

This sounds wonderfully sensible.

Sell before things get worse.

Wait.

Then buy again when the recovery begins.

There's only one slight inconvenience.

You need to make two successful timing decisions.

When to get out.

And when to get back in.

The FCA notes that short-term market movements are notoriously difficult to predict and that attempts to time entry and exit points can create the risk of buying or selling at the wrong time.

That's why investment decisions shouldn't simply be reactions to frightening headlines.

Why does my timescale matter so much?

Imagine two investors experience the same 25% fall.

Investor One

Needs the money next year.

Investor Two

Doesn't expect to need the money for another fifteen years.

Same market fall.

Very different problem.

Investor Two has more time in which investment values may change again.

That doesn't guarantee recovery.

Investor One has much less flexibility.

This is why we keep coming back to:

When will you need the money?

The FCA describes investing as generally being a longer-term activity and uses at least five years as a useful planning timeframe.

But five years is not a guarantee of profit or recovery.

What if I'm taking money from my investments?

Now things become particularly important.

If you're accumulating investments and markets fall, you may have the ability to leave them alone.

If you're regularly withdrawing money, you may be selling investments while values are depressed.

That can have a different effect on how long the remaining money lasts.

This becomes particularly important during retirement.

We've covered that issue separately in the completed Retirement Planning Foundation:

Guide — What Happens to My Retirement Income if Investments Fall?

and:

Guide — How Do I Make My Pension Last Throughout Retirement?

Those guides deal specifically with the additional challenge of taking income while investment values fluctuate.

What if I keep investing while markets are falling?

If you're making regular contributions, a market fall means the same contribution can purchase more units of an investment when its price is lower.

If prices subsequently rise, those additional units participate in that movement.

But don't turn that into:

"Market falls are good."

They're not automatically good.

Prices could continue falling.

An investment could fail.

And future recovery isn't guaranteed.

The useful point is simply that somebody investing regularly may experience falling markets differently from somebody who needs to sell investments.

What should I check during a market fall?

This is where we separate reviewing from reacting.

A sensible review might ask:

1. What exactly do I own?
2. Am I properly diversified?
3. Has my objective changed?
4. Has my timeframe changed?
5. Do I need this money sooner than expected?
6. Has my capacity for loss changed?
7. Has something fundamentally changed about the investment?
8. Am I considering a change because of my financial plan — or because I'm frightened by today's headlines?

That's a much more useful conversation than:

"Everything's red. Sell it."

What if the fall makes me realise I'm taking too much risk?

That's useful information.

Not pleasant information.

But useful.

Sometimes people only discover their true attitude to investment risk when markets fall.

A questionnaire saying:

"How would you feel if your investment fell 20%?"

is hypothetical.

Watching £100,000 become £80,000 isn't.

If a market fall makes you realise the investment risk is genuinely inappropriate, that deserves a proper review.

But be careful about making a permanent decision purely in response to temporary fear.

Understand the problem first.

Then decide whether something needs changing.

What shouldn't I do during a market fall?

Be particularly cautious about decisions driven by:

panic;

social-media predictions;

television headlines;

friends telling you what they've sold;

trying to guess tomorrow's market movement;

or suddenly moving everything into whatever happened to perform well last year.

Markets falling can make people feel that they must do something.

Sometimes a change is justified.

Sometimes it isn't.

Activity and good decision-making are not the same thing.

What Should I Do Next?

Don't wait for a market fall before discovering what you own.

Look at your investments now.

Ask:

What am I invested in?

How diversified is it?

How much could it reasonably fluctuate?

When will I need the money?

What would a significant fall actually do to my financial plan?

And:

Would I understand what to review before reacting?

If those questions are difficult to answer, that's where the work begins.

Because there's one final fear we need to deal with in this batch:

Guide 10 — Can I Lose All My Money Investing?

The Open Door Wealth View

Stock-market falls aren't pleasant.

But they shouldn't come as a complete surprise either.

If your financial plan assumes investments only ever move upwards, you don't really have an investment plan.

You have a very optimistic spreadsheet.

A proper investment plan should acknowledge that:

markets fall;

investments fluctuate;

recovery isn't guaranteed;

and:

you may occasionally open a statement you really don't enjoy looking at.

The important thing is understanding what you own, why you own it and whether your wider financial plan can withstand periods when markets behave badly.

Don't build a plan that requires markets to behave themselves. They haven't agreed to.

Suggested Call to Action

Worried about what a market fall could do to your pensions or investments?

Open Door Wealth can help you understand what you're currently invested in, how diversified it is, how much risk you're taking and what a significant market fall could mean for your wider financial plans.

Understand what you own before deciding whether anything needs changing.