In the two-year period between 2023 and the end of last year, the S&P 500 (^GSPC 0.55%) rocketed 53.2% higher while the Nasdaq Composite (^IXIC 0.70%) surged a mind-numbing 84.5%. So heading into 2025, some investors may have already been concerned that valuations had gotten ahead of fundamentals.
Both indexes are in the red year to date, with the Nasdaq down over 9% from its 52-week high. The sell-off is still a long ways away from a full-blown market crash, which is defined as a rapid decline of 20% or more. But given the Nasdaq reached an all-time high in December and nearly surpassed that all-time high just a few weeks ago, the term “crash” would certainly apply if the Nasdaq sold off another 10% or so in a short period of time.
No one knows if a crash is on the way or if the market will be back to making new highs before we know it. However, there are actions you can take, and mistakes to avoid, if the market does crash. Here are three critical mistakes that you can learn to avoid making the easy way.
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1. Getting caught up in market noise
Market noise has never been louder. Access to the world’s information is rarely more than an arm’s length away. Many brokerages offer commission-free trading and have mobile apps, meaning it’s also never been easier to react to that information.
Stock prices reflect knee-jerk reactions to market news, which have nothing to do with fundamentals. As individual investors, it can be useful to be aware of market happenings and company updates, but letting those events impact how you invest or what’s in your portfolio can be a mistake.
2. Overhauling your investment strategy
Probably the biggest mistake to make during a market crash is changing an investment strategy based on short-term price action. Even the best companies can see their stock prices plummet during a market crash simply because sentiment has turned negative.
Stock prices reflect consensus views at a given period, which can lead to stock prices rising or falling for the wrong reasons.
Using the stock price as a measuring stick for what a company is worth is never a good idea. The last time the stock market underwent a major sell-off was 2022 when the Nasdaq lost a third of its value. If you had bought shares in megacap growth stocks like Nvidia (NASDAQ: NVDA) or Meta Platforms (NASDAQ: META) in 2021, you would have probably been feeling pretty down about that decision in 2022 as Nvidia and Meta both lost over 50% of their value.
But if you zoom out, you’ll see that buying shares in those companies, even when factoring in the 2022 sell-off, was a brilliant decision. Meta is up 90% since 2021 in that period, while Nvidia has increased nearly four fold.
Fight or flight is human instinct. So when the market is going down, it can be tempting to sell out and run for the exits (flight) or try and take action by trading your way out of a sell-off (fight). But history shows that doing nothing, or basically just holding shares in good companies through periods of volatility, is often the best course of action.
3. Complacency
While it’s true investors shouldn’t get caught up in market noise or overhaul their investment strategies during a stock market sell-off, it’s also a mistake to be too complacent. Valuations matter, and sometimes, stock prices can run too far too fast and get separated from fundamentals.
Stock market sell-offs are a good time to conduct a portfolio review and ensure you know what you own, why you own it, and that you are confident that the business is sound and worth owning over the long term rather than a position that was acquired just to make a quick buck.
During bull markets, optimistic investors may be willing to look past weak fundamentals and focus on a company’s potential. But patience can run out when equity prices are dropping. Investors may be less willing to give a company the benefit of the doubt that a new product or service rollout will be successful or that an addressable market will be tapped.
Companies with established business models or clear paths to growth stand a better chance of enduring a downturn. In fact, the best companies can even take market share during a slowdown by increasing their lead over the competition or acquiring other companies on the cheap.
By conducting a portfolio review, you can update your investment theses on your stocks and ensure that you hold those positions for the right reasons and have the conviction needed to endure volatility. You can also update your watchlist with companies that have excellent fundamentals and growth prospects. That way, you can have a clear game plan for putting future contributions to work in the market, thereby cutting through the noise.
Focus on the big picture
Stock market sell-offs, and especially crashes or bear markets, can be painful. Whether you have $1,000 or a million-dollar portfolio, losing money doesn’t feel good especially during the bleakest points in the sell-off when there is a fleeting sliver of hope that the tide will turn.
At times like this, it is especially important to take a step back and remember what investing is all about — positioning your portfolio to grow in value over time. After all, making the best stock selections in the world means little without patience and time.
Avoiding mistakes is just as, if not more, important than making sound investment decisions. And since stock market sell-offs are an opportune time to make mistakes, it’s best to be on high alert for what some of those mistakes may look like so you can avoid them rather than learn the hard way.
Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Meta Platforms and Nvidia. The Motley Fool has a disclosure policy.
