When the Stock Market Drops, Stay Calm and Do Nothing

Think of what’s happening in the stock market as a kind of fire drill. As we all know from childhood, one of the primary rules is not to panic. And in this case, panicking would mean selling stocks when the market is falling.

You run drills to stay sharp, but we haven’t had much experience with the S&P 500 stock index falling by more than 3 percent in a single day. According to Howard Silverblatt of S&P Dow Jones Indices, the last time it happened was Sept. 13, 2022.

Given that it’s been a nearly two-year stretch, we can excuse ourselves for getting a bit sloppy. So many people got nervous and ran to check or trade investments Monday morning, and many of them had trouble logging into brokerage firm websites and apps including those of Charles Schwab, Fidelity and Vanguard.

But really, why sell at a moment like this? It’s not a rhetorical question, so let’s try to answer it.

Selling is smart if you know that the stock market is about to fall by a lot and stay down for a long time. Most people don’t know, however, and those who got it right in 2022 or 2020 or 2008 or 2000 or 1987 may not know the difference between the skill they think they have and the luck that probably helped them back then.

Many of the people who traded furiously on Monday are professional investors of various sorts — or the robots they programmed to automatically sell when this or that indicator flashes yellow or red. But here’s a dirty little secret about, say, hedge funds: All of their trading in reaction to world events doesn’t lead most of them to do better than sticking money in an index fund that tracks the stock market. Mutual fund managers don’t do much better.