What is a market sell-off?

When investments are sold on a mass scale and cause share prices to fall, it’s known as a ‘market sell-off’. Recent collapses of some banks and companies are a reminder of the volatile nature of stock market investing - but fortunately, there are ways to counter it.

| 4 min read

Over the past couple of decades, investors around the world have laboured through nail-biting moments where large volumes of stocks, crypto and bonds have fallen in value. Some investors will look for quick gains, others panic and make mistakes they later regret when the volatility evens out. What are some of the ways you can invest with confidence during a market sell-off?

How to invest during a market sell-off

1. Don't panic

After a market crash, emotional reactions will mean that price falls will often be exaggerated. It’s part and parcel of investing and should be expected from time to time – indeed a well known City adage goes, “market rise up the stairs and go down the elevator”.

Gently rising markets tend not to make newspaper headlines, but precipitous falls do – and it all adds to the general sense of fear. In the long run, markets are driven by company earnings, so think rationally about your investments. During a market-sell off when share prices are volatile, buying or selling in haste can result in being on the wrong end of price swings.

2. Get some context

Although there might be more questions than answers at the time, a market sell-off can often help you think about the impact on individual companies or sectors. Are profits now under more pressure? What are the opportunities given the change in the landscape? What are the threats?

Also, try to get a sense where valuations are relative to history. Think about whether valuations compensate you for the risks. Following a large market fall an overly pessimistic scenario may already be reflected in prices - and there could be a bounce as greater certainty or assurance is provided.

3. Diversify your investments

During a market sell-off where large swathes of shares are being sold, it might seem intuitive to focus on one type of company or one sector. But piling investments into one area is likely to increase the risk of volatility in your portfolio. Investors typically build portfolios of various shares and other assets so that they are not overly reliant on any one investment or asset class performing well – this is known as diversification.

Holding a variety of investments from different areas around the world also can spread risk out, so you don’t have all your eggs in one basket. If you do decide to invest overseas, be sure to learn the extra risks such as currency exchange movements and charges.

4. Stick to the plan

Hopefully you already have a plan in terms of how much money you are investing, or seeking to invest, and which areas it is allocated to. Market volatility will test your resolve, and in some cases you might question your decisions. Perhaps a market sell-off has revealed you have too little diversification, or you are taking too much risk. In these instances you may wish to make changes.

However, if your plan is a sound one (a well-diversified portfolio with a decent amount of cash for emergencies), it often makes sense to do little or nothing.

5. Use market falls to your advantage

We all know we should be buying when asset prices are low and selling when they are high. However, this is hard to achieve and many people end up making emotionally-led decisions and doing the opposite. A large fall in the markets could be just the opportunity you have been waiting for to invest in an area you have had your eye on but felt was too expensive.

If it is still too much of a leap of faith consider averaging in - buying your shares or units in stages over time or by setting up a monthly investment amount. The latter takes away any consideration of timing the market, which can be a relief.

Market sell-offs when combined with other factors can lead to an economic recession. Be sure to check out the article below if you’d like to pick up more insight on this: How to invest during a recession

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

What is a market sell-off?

Read this next

Will there finally be some good wealth management in Succession S4?

See more Insights

Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and Prospectus.

More insights

Five investment trends defining the first half of 2024
By Rob Morgan
20 Jun 2024 | 12 min read
China’s central bank criticises Fed policy
By Charles Stanley
20 Jun 2024 | 16 min read
G7 backs Ukraine and tackles migration
By Charles Stanley
17 Jun 2024 | 6 min read
Wall Street continues record-beating run
By Garry White
Chief Investment Commentator
14 Jun 2024 | 12 min read