What to Do When Investment Markets Drop

Seven things you can do when your investment value falls

Investing involves risk. Whether you own an investment property, contribute to a KiwiSaver Scheme, or hold shares or a managed fund, you accept a trade-off: the possibility of short-term losses in exchange for long-term growth. And at some point, your investments will fall in value.

As a New Zealand financial advisory and investment management firm, we see the same pattern after every market dip. People call asking whether they should switch their KiwiSaver Scheme fund choice, sell their shares, or move everything to term deposits. The answer is almost always: don’t. But the reasons behind this advice matter, and understanding them will make you a better, calmer investor.

A note before we begin: the advice in this article assumes your investment time horizon and personal circumstances have not fundamentally changed. If you are facing forced selling, unexpected job loss, or an immediate need for cash, your situation is different, and professional advice tailored to your specific circumstances is important.

For everyone else, here are seven approaches grounded in evidence and tested by time.

Why Your Brain Is Working Against You

The first thing most people feel when their portfolio drops is an overwhelming urge to do something. This instinct has a name: loss aversion. Psychologists Daniel Kahneman and Amos Tversky, whose work eventually won Kahneman the Nobel Prize in Economics, demonstrated the pain of losing money is roughly twice as intense as the pleasure of gaining an equivalent amount.

A related bias makes it worse. Behavioural scientists call it “action bias”: the deeply human tendency to feel better when doing something, even if it is counterproductive. In football, goalkeepers who dive left or right during a penalty save fewer shots than those who stand still in the centre, yet almost every goalkeeper dives. Investors behave the same way. Selling, switching funds, or frantically rebalancing feels productive. Sitting tight feels like surrender. But in both cases, the evidence says standing still is often the smarter move.

DALBAR’s 2025 Quantitative Analysis of Investor Behavior found the average equity investor earned just 16.54% in 2024, compared to the S&P 500’s 25.02% return. The culprit was behaviour: selling at the wrong time, buying back in too late, and tinkering when patience was the better choice.

Over a 20-year period, this behaviour gap compounds dramatically. The average investor’s portfolio ended up worth roughly 22% less than a simple buy-and-hold approach would have delivered. And this data covers the U.S. market, where investor behaviour is arguably better studied and more supported than in New Zealand.

One more cognitive trap worth knowing: recency bias. When markets are falling, your brain convinces you they will keep falling indefinitely. This feels logical in the moment but ignores the weight of history. Keep this in mind: you have not actually lost anything unless you sell. Until then, any drop in value is unrealised. Markets cycle through periods of expansion and contraction. Enduring these price shifts is how you capture long-term gains.

Seven Approaches for Dealing with a Market Drop

1. Do Nothing (Yes, Really)

Core principle: The single most effective response to a falling market is also the easiest: leave your investments alone.

Morningstar’s analysis of 150 years of stock market crashes found every documented crash was eventually followed by a recovery to new highs. The March 2020 Covid crash recovered in just four months, the fastest rebound in 150 years. The 2008 Global Financial Crisis took longer, but investors who stayed put were well rewarded in the decade of growth which followed.

During a downturn, many New Zealand investors feel pressure to switch their KiwiSaver Scheme from a growth fund to a conservative one. This feels prudent but often means locking in your losses. When the market rebounds, you will be holding safer, lower-return assets such as cash and bonds rather than the shares driving the recovery.

As Become Wealth adviser Nik puts it, “The best investment decision most people will ever make is the one they didn’t make during a panic. Doing nothing when your gut is screaming at you to act requires real discipline, but it is almost always the right call.”

One important caveat: doing nothing is not always the right call. If your personal circumstances have genuinely changed, for example, you now need the money within two years rather than ten, or your income has dropped substantially, then adjusting your portfolio to reflect your new reality is sensible. The distinction is between reacting to the market and responding to your life.

2. Should You Invest More When Markets Fall?

Core principle: A downturn is, by definition, a buying opportunity. When prices fall, you are purchasing the same assets at a discount.

Warren Buffett put it memorably: be fearful when others are greedy, and greedy when others are fearful.

You do not need Buffett’s bank balance to apply his principle. Depending on your life stage, this might mean topping up your KiwiSaver contributions, adding to a managed investment portfolio, or moving cash savings into a diversified fund while prices are lower.

Think of it this way: if you own shares in a well-managed, profitable business and the price suddenly drops because of something entirely unrelated to the business itself, you are being offered more of a good thing at a lower cost. You would not complain if your favourite restaurant halved its prices for a month. The same logic applies to investments.

It is also worth remembering what happens to cash over long periods. While a market downturn feels dangerous, leaving your money in a savings account is not “safe” in any meaningful sense. Inflation quietly erodes purchasing power year after year. Over decades, a conservative cash position can lose far more real value than a diversified portfolio temporarily sitting in the red.

3. Stop Watching Your Portfolio

Core principle: Frequent monitoring leads to worse outcomes, not better ones.

Checking your portfolio daily during a downturn is the financial equivalent of opening the oven every two minutes to check on a roast: it does not help the cooking, and it lets all the heat out. A landmark study by behavioural economists Shlomo Benartzi and Richard Thaler (who later won the Nobel Prize) found investors who reviewed their portfolios less frequently allocated more to growth assets and earned higher returns over time.

If you need to, lock yourself out of your investment app for a few months. Your future self will thank you. For a deeper dive on this topic, read our article on how often you should check your portfolio.

If reading this during a downturn has you questioning whether your current setup is right for you, a complimentary initial meeting is a simple way to get a second opinion before making any changes.

4. How Long Do Market Recoveries Actually Take?

Core principle: Most investments are made with a timeframe of many years or decades. A rough quarter, or even a rough year, represents a tiny fraction of your total investment horizon.

Since the Second World War, the S&P 500 has experienced 13 bear markets (drops of 20% or more), with an average decline of about 36%. The average bear market lasted roughly 18 months. But here is what matters: the bull markets following each bear have been dramatically larger and longer. Capital Group research shows successful market timing is nearly impossible because it requires two perfect decisions: knowing when to sell and when to buy back in.

The average correction (a drop of 10% to 20%) has historically recovered in roughly four to eight months. Even more severe bear markets have typically recovered within two to three years. A dollar invested in the U.S. stock market in 1871, adjusted for inflation, would have grown to over US$35,000 by early 2026. The ride included 19 crashes, but the destination was never seriously in doubt for patient investors.

We routinely observe a pattern among new clients who come to us after a downturn: they switched their KiwiSaver Scheme fund from growth to conservative during the drop, then never switched back. By the time they seek advice, the market has recovered and they have missed most of the rebound. This is one of the most expensive financial decisions a New Zealander can make, and one of the most avoidable.

Understanding your investment horizon is one of the most important factors in how you should respond to a market drop.

5. Match Your Investments to Your Goals

Core principle: A market downturn can serve as a useful stress test for your current position.

If a drop of 20% is keeping you awake at night, it may signal a mismatch between your portfolio and your actual risk tolerance or time horizon. Consider these questions:

• What are your financial objectives, both short-term and long-term?
• How long can you leave your money invested before you need it?
• How comfortable are you with fluctuations and potential short-term losses?
• Is your portfolio well-diversified across different asset types and geographies?
• Do your current investments still reflect your life stage?

The answers shape your personalised investment plan. It is worth revisiting these questions every year or so, and certainly after any significant life event such as the birth of a child, a change in employment, or receiving an inheritance.

6. Beware Hype and Trend-Chasing

Core principle: Market downturns tend to expose the investments built on hype rather than fundamentals.

When the tide goes out, as Buffett once observed, you discover who has been swimming without trunks. The pattern repeats with remarkable consistency: an exciting new category captures attention, prices soar beyond any rational valuation, and then the inevitable correction arrives. The investors who piled in near the peak absorb the heaviest losses.

The lesson is straightforward: invest based on your long-term goals and a well-considered plan. Conduct your own research or work with an adviser who understands your circumstances. A boring, well-diversified portfolio with low fees is far more likely to build lasting wealth than anything trending on social media.

7. Why Diversification Matters Most During a Downturn

Core principle: Spreading your investments across asset types, industries, and geographies reduces the impact of any single position going wrong.

Diversification significantly softens the blow during a broad market downturn. For New Zealand investors, this carries an additional dimension. The NZX 50, while a solid index, represents a small, concentrated market. S&P Dow Jones Indices data shows the NZX 50 has outperformed the Australian ASX 200 with lower volatility over its first two decades, but a well-diversified portfolio should still extend beyond New Zealand’s borders.

Done well, diversification helps you absorb the inevitable punches without being knocked out of the ring.

KiwiSaver: Your Built-In Downturn Advantage

New Zealand investors have a structural advantage many overseas investors lack. KiwiSaver acts as a built-in dollar-cost averaging mechanism. Your regular contributions automatically buy more units when prices are low and fewer when prices are high, smoothing out volatility over time without requiring you to make any active decision.

If you have taken a contribution holiday, a market downturn is the worst time to remain on a break. You are effectively opting out of buying at lower prices, which is the opposite of what you want. Consider restarting contributions, even at the minimum rate, to ensure you are capturing the benefit of lower entry prices during a downturn.

The key is to ensure your KiwiSaver Scheme fund choice matches your investment horizon. If you are decades from retirement, a growth-oriented fund gives your money the longest runway to recover from short-term drops. Switching to a conservative fund during a downturn locks in your losses and removes your ability to participate in the recovery.

Questions We Hear from Clients

“I’m tempted to sell everything. Why shouldn’t I?”

Selling during a downturn locks in your losses and means you miss the recovery. Unless your personal circumstances have changed materially, the evidence overwhelmingly favours staying invested. Historically, across every modern market cycle, major markets have recovered and gone on to reach new highs.

“Should I switch my KiwiSaver Scheme to a conservative fund until things settle down?”

This is one of the most common and costly mistakes New Zealand investors make. You effectively sell your growth assets at a low point and buy into conservative assets which will not participate fully in the recovery. If your investment horizon has not changed, your fund choice probably should not change either.

“How long will this downturn last?”

Nobody knows for certain, including us. Recovery times vary widely. The average correction (10% to 20% drop) has historically recovered in roughly four to eight months. Bear markets (drops exceeding 20%) have typically taken around two years on average, though some have been much faster. Trying to predict the bottom is a losing game even for professionals.

“Is now actually a good time to start investing?”

A downturn can be an excellent time to begin investing or to add to existing positions. Prices are lower, meaning your money buys more. The hardest part is overcoming the emotional discomfort of investing when headlines are alarming, which is precisely why most people do not do it, and why those who do tend to be rewarded.

“How much should I keep in cash versus investments?”

The right balance depends on your circumstances, risk tolerance, and time horizon. A common starting point is to keep three to six months of living expenses in accessible cash, then invest the rest according to your goals. For a fuller discussion, see our article on when to save versus invest.

Conclusion: What to Do When Investment Markets Drop

Here is the uncomfortable truth about investing: the moments which feel most dangerous are often the moments which matter most. The investor who holds steady during a downturn, resists the urge to tinker, and perhaps even invests a little more is following the same playbook used by virtually every successful long-term investor in modern history.

Benjamin Graham, the father of value investing and Warren Buffett’s mentor, summed it up well:

‍“The investor’s chief problem, and even his worst enemy, is likely to be himself.”

Stay calm. Stay diversified. Match your investments to your actual goals and timeline. And if you can, invest more when prices are low. When values recover, and historically they always have, you will be glad you did.

If you want help reviewing whether your current portfolio is positioned for the next downturn, the team at Become Wealth would be glad to have a conversation. Book a complimentary initial consultation and take one step closer to financial freedom.