The Worst Mistakes to Avoid in a Market Downturn

Four common mistakes, four straightforward fixes

Investment markets follow cycles. After extended periods of growth, downturns are inevitable, and most investors will experience several over a lifetime. The pattern is remarkably consistent: markets fall, financial headlines turn apocalyptic, and otherwise rational people make decisions they later regret.

At Become Wealth, we never claim to know how severe a downturn will be or how long it will last. Nobody does, despite what the most confident voice at your next dinner party might suggest. What we do know, backed by decades of research, is some investors will make predictable, costly mistakes before values recover.

If you are reading this mid-downturn and want one sentence: in most cases, the right move is to do nothing with your growth investments. Keep contributing, stop checking, and revisit your plan when the noise settles. Here is why.

Mistake 1: Panic Selling and Missing the Recovery

When investment values drop, the urge to do something can feel overwhelming. For many investors, doing something means selling riskier assets and retreating to cash or conservative funds. Within KiwiSaver Schemes, this typically looks like switching from a growth fund to a conservative option.

The cost is immediate and often permanent. Selling after a fall locks in losses. The recovery, when it comes, tends to arrive without warning.

Bank of America Global Research analysed S&P 500 data going back to 1930 and found if an investor missed just the 10 best trading days in each decade, their total return would have been 91%. Investors who held steady through everything earned 14,962%. Crucially, the best days for shares tend to cluster immediately after the worst. Miss the disaster, and you are likely to miss the rebound too. While these figures come from US markets, the pattern holds across diversified global equity portfolios, including the kind most New Zealand investors hold through KiwiSaver Schemes and managed funds.

New Zealand's Financial Markets Authority documented the local cost of this behaviour during the COVID-19 turbulence. KiwiSaver Scheme fund switching surged to 2.7 times the prior year's rate, with younger members the most likely to move from growth to conservative funds. Only about 9% ever switched back. The rest stayed in low-return funds long after markets had fully recovered, crystallising losses at the worst possible moment and then sitting on the sidelines while everyone else rode the recovery.

This is a textbook case of loss aversion at work. In our experience advising through multiple market downturns, the clients who come out best are almost always the ones who changed nothing.

Morningstar's analysis of all-stock portfolio returns after six historical US downturns tells the same story. In the short term, four of the six events produced negative returns. Over three to five years, the picture reversed dramatically. An investor who held through the 1987 crash, for instance, earned roughly 40% within three years. The lesson is not complicated: patience is a competitive advantage.

The Case for Sitting Still

Stay calm and stay invested. If your investments are properly diversified and aligned with your time horizon, a downturn is not a reason to change course. It is the scenario your portfolio was built to withstand. Since 1950, the average bear market in the S&P 500 has lasted about 11 months from peak to trough, with recovery taking roughly two years. Some are much shorter. The COVID-19 crash recovered within six months. Every single one has eventually recovered. For a deeper look at why downturns can work in your favour, see our article on how stock market crashes can change your life for the better.

Mistake 2: Having No Plan, or Ditching Yours When It Matters

"Everyone has a plan 'till they get punched in the mouth." — Mike Tyson

Tyson was talking about boxing, but the principle translates perfectly. A plan feels robust when markets are rising 15% a year. It feels rather less robust when your portfolio has just dropped 20%.

Investing without a clear plan is an invitation to chase performance, react to headlines, or attempt to time the market. These temptations multiply during downturns, when the desire to protect your portfolio can override years of sensible thinking.

A good investment plan does not need to be complicated. At its core, it answers three questions: What are you investing for? How long until you need the money? And how much volatility can you genuinely tolerate along the way?

Your time horizon matters enormously. If you are 30 years old with decades until retirement, what markets do this year is largely noise. Your KiwiSaver Scheme contributions are buying units at lower prices, which is exactly what you want when you are still accumulating. If you are five years from accessing your money, your plan should already account for a downturn, with a more conservative allocation for the portion you will need soon.

Building a Plan You Can Stick To

• Make a plan, then hold to it. If you do not have one, a financial adviser can help you build one suited to your circumstances and goals.
• Before making any changes during a downturn, revisit the original reasoning behind your investment choices. If your goals and time horizon have not changed, the answer is usually to hold firm.
• Remember your KiwiSaver Scheme is not a bank account. It is a long-term investment designed to grow wealth over decades, not deliver consistent returns every quarter.

Mistake 3: Obsessively Watching Your Portfolio

Here is something no investment app will tell you: checking your portfolio more often does not make it perform better. The evidence suggests it makes your decisions worse.

Research into myopic loss aversion shows investors who monitor their portfolios frequently see more short-term losses, experience more emotional distress, and are more likely to sell at the wrong time. On any given day, even in a rising market, there is roughly a coin-flip chance your portfolio will be down. Over a year, the odds shift heavily in your favour. Over a decade, they shift further still.

During a downturn, the temptation to check daily is understandable. But every glance at a red number reinforces the feeling you need to act. And acting, as Mistake 1 explains, is usually the most expensive option available.

Morningstar's Mind the Gap research estimates investors forfeit roughly 1.2 percentage points per year through poorly timed decisions. Over a decade, this compounds into roughly 15% of total potential returns simply evaporating because of behaviour. Your portfolio does not need a more attentive owner. It needs a calmer one.

We see this regularly in practice. Clients who review their balances quarterly make better decisions than those logging in weekly. The ones who call us during a sell-off to ask whether they should do something almost always hear the same answer: no.

A Calmer Approach

Set a review schedule, perhaps quarterly or twice a year, and resist checking in between. Some people find it helpful to remove the app from their phone for a few weeks during volatile periods. Your future self will thank you, even if your present self feels slightly twitchy about it.

Mistake 4: Letting a Downturn Undermine Your Wider Finances

When markets are falling and every headline screams about billions wiped from global indices, it is easy to fixate on your investment portfolio and forget everything else.

This is the financial equivalent of rubbernecking. When we see an accident on the road, we slow down and stare. Understandable, but rubbernecking causes further accidents. The same dynamic applies to your finances: staring at your investments while ignoring everything else can create problems where none existed.

While your existing portfolio takes care of itself (see Mistake 1), there are practical steps worth taking to ensure the rest of your financial life does not quietly deteriorate, and one opportunity worth considering.

Strengthening Your Foundations

• Consider investing more. For those with spare cash and a long investment time horizon, a downturn is one of the best times to put additional money to work. Warren Buffett has consistently argued investors should prefer falling prices when they are net buyers of shares, for the same reason you would prefer a sale at any other shop. The caveat: only invest money you genuinely will not need for years, and ensure your day-to-day finances can absorb any short-term shocks first.
• Keep paying down expensive debt. In New Zealand, credit cards typically charge 20% or more, and personal loan rates often sit well above 10%. No investment can reliably match the guaranteed return of eliminating high-interest debt. If you are carrying both a mortgage and consumer debt, clearing the consumer debt first almost always makes more mathematical sense.
• Review your insurance. Ensure you have appropriate health insurance and consider whether you are adequately covered if you were to become unable to work for an extended period. Redundancy risks tend to rise during prolonged downturns, and New Zealand's statutory minimum redundancy provisions remain limited for most employees.
• Stay alert for scams. Fraudsters thrive during periods of uncertainty, often pitching safe havens or guaranteed returns to people rattled by falling markets. The FMA regularly warns about increased scam activity during market stress. If an offer sounds too good to be true during a downturn, it is almost certainly too good to be true during a downturn. See our guide to financial traps and scams.

Market downturns are uncomfortable, but they are not unusual. They are a normal part of how investment markets work, and most investors will experience several over a lifetime. The mistakes covered here, panic selling, flying without a plan, obsessing over short-term values, and neglecting your wider finances, are predictable, well-documented, and entirely avoidable. Most damage in downturns is self-inflicted.

If you are unsure whether your portfolio is actually built for this kind of environment, or if you simply want the confidence a clear plan provides, our advisers would genuinely enjoy the conversation. Book a complimentary initial consultation and take one step closer to financial freedom on your own terms.