The S&P 500’s drop: What smart investors are doing differently

5 minute read

As of Tuesday close, the S&P 500 is down around 12% over the past four trading sessions. This is among the worst multi-day declines in the index’s history – alongside March 2020, October 2008 and October 1987.

You might have seen the headlines “market meltdown”, “recession looms”, and “economic nuclear war” – it’s easy to get caught up in the panic and overlook calls to stay calm and stay invested. 

If you’re not convinced quite yet that staying invested is the best course of action, let’s see what smart investors do differently during these so-called “market crashes”. When the S&P 500 is falling how are some able to keep their portfolios rising?

Three things smart investors do to capitalise on market downturns

1. They don’t panic sell

It can be heart-wrenching to see your portfolio drop 10%, or even 20%, but panic selling or pulling out of all your investments is just about the worst thing you could do right now. Investors that are able to capitalise on market downturns put volatility into perspective.

Despite its worst drawdowns the S&P 500 has made consistent gains – more than 520% over the past 20 years – and that’s over the course of the COVID-19 pandemic and the Global Financial Crisis.

Five years after the infamous Black Monday of 1987, the market soared 119%. After the 2020 drop, it gained 144%. Even the 2008 crash ultimately saw returns of 110% over the next five years and continued on to become one of the longest bull markets in history.

Smart investors that are in it for the long-game are looking at this data and positioning their portfolios for the recovery – by diversifying and dollar-cost averaging. They understand that volatility is a natural part of market cycles. The most important thing you can do is to stay invested through these fluctuations to capture long-term gains.

2. They dollar-cost average

The most resilient investors treat market volatility not as a threat, but as an opportunity – through dollar-cost averaging. Rather than trying to time the perfect market entry, they commit to investing a consistent amount at regular intervals – whether weekly, monthly, or quarterly.

Over time, this lowers your average cost per share compared to investors who buy at random or emotional moments. This simple approach turns short-term market dips into long-term advantages. Plus, the psychological benefits are just as valuable as the financial ones. Dollar-cost averaging is a strategy that sidesteps the anxiety of market timing and the paralysis that often accompanies volatile periods.

3. They diversify

An antidote for uncertainty is strategic diversification. Investing across different asset classes and geographies creates resilience when market conditions shift. When technology stocks stumble, your gold allocation or government bonds could provide stability. When US stocks face headwinds, your other international holdings might capture growth elsewhere.

Equally crucial is calibrating your portfolio to a risk level that matches both your financial goals and your risk tolerance. Higher-risk portfolios might place greater emphasis on growth-oriented equities. Conservative portfolios do the opposite, focusing on protective assets like bonds. By diversifying according to the level of risk you’re comfortable with, you end up with a financial strategy that you can stick with.

A rare opportunity

Volatility and sharp market drops as seen in recent days can feel overwhelming, but it’s also a rare chance to set yourself apart as an investor. As we’ve witnessed from history, such large and abrupt market drops like this don’t happen very often. So think about which side of history you would like to be on. Market volatility shouldn’t be feared – it should be seen as an opportunity to double down on dollar cost averaging and diversifying your portfolio.