Top 5 mistakes investors make during market selloffs

​​​Panic selling at market lows

​Perhaps the most damaging mistake investors make during market selloffs is panic selling. When markets plunge, our instincts often tell us to "get out before it gets worse." This emotional response typically leads to selling at or near market lows, locking in losses rather than giving investments time to recover.

​Recent market data illustrates this pattern clearly. During the tariff-induced selloff in early 2025, retail trading volumes spiked dramatically on the third day of declines – precisely when the market hit its lowest point. Those who sold at this juncture missed the subsequent 15% market recovery over the following six weeks, significantly damaging their long-term returns.

​The psychology behind panic selling is well-documented. Loss aversion – our tendency to feel the pain of losses more acutely than the pleasure of gains – drives much of this behaviour. When investors see their portfolios declining in value, the emotional discomfort can override rational decision-making, pushing them to take action even when patience would serve them better.

​To combat this tendency, consider implementing automatic rebalancing in your portfolio rather than making manual adjustments during periods of high emotion. Setting specific rules in advance about when you'll consider selling can help counter emotional reactions.

Attempting to time the market bottom

​The second critical mistake investors make is attempting to time the market bottom. After selling during a decline or holding cash on the sidelines, many investors then try to identify the perfect moment to re-enter the market. This approach almost invariably fails, as market timing requires being right twice – both on the exit and the entry.

​The data on market timing is compelling. A JP Morgan study found that missing just the 10 best days in the market over a 20-year period would have reduced returns by approximately 50%. What's more striking is that many of these best days occur shortly after significant declines, often when sentiment remains negative, and many investors are still waiting for clearer signs of recovery.

​During the recent tariff-induced volatility, many investors who sold during the initial decline remained on the sidelines for weeks after the recovery began, waiting for confirmation that the rebound was "real." By the time they felt confident enough to reinvest, the market had already recovered most of its losses, effectively turning temporary paper losses into permanent ones.

Overtrading during volatile periods

​The third mistake is overtrading during volatile markets. Market selloffs typically bring increased volatility, with significant price swings creating the illusion of trading opportunities. Many investors increase their trading frequency during these periods, believing they can capitalise on these movements.

​Transaction data from major brokerages tells a sobering story: the average retail investor who increased their trading activity during the recent market volatility underperformed those who maintained their regular investment patterns. Trading costs, timing errors, and the bid-ask spread all combine to erode returns, particularly in choppy markets where price directions can reverse rapidly.

​The psychological driver here is the illusion of control. When markets seem chaotic, increased trading activity creates a feeling of "doing something" to manage the situation. However, this activity is often counterproductive, as market volatility makes short-term price movements even more unpredictable than usual.

​Instead of increasing trading frequency, consider establishing a regular investment schedule. Pound-cost averaging – investing fixed amounts at regular intervals regardless of market conditions – can be particularly effective during volatile periods, allowing you to acquire more shares when prices decline without requiring precise timing.

Following the professional crowd

​The fourth significant mistake is following the professional investment crowd. During selloffs, financial media amplifies professional opinions, creating the impression that these experts have special insight into market direction. In reality, professional investors are subject to their own biases and institutional pressures that often lead to herd behaviour.

​During the recent tariff volatility, major investment banks issued a flurry of downgraded forecasts and defensive recommendations. These shifts received extensive media coverage, influencing many individual investors to reposition their portfolios accordingly. When markets subsequently recovered, those who followed this professional consensus found themselves wrong-footed and underperforming.

​The institutional factors driving professional behaviour during selloffs are worth understanding. Fund managers face career risk if they deviate from their peers, creating strong incentives for consensus positioning. Additionally, demonstrating responsiveness to market events is often valued institutionally, even when patience might be the better investment strategy.

​Rather than following professional recommendations during selloffs, focus on your own investment time horizon and goals. Professionals often manage to shorter time frames than individual investors, making their tactical positioning less relevant for those with longer-term objectives.

Abandoning diversification principles

​The fifth crucial mistake is abandoning diversification principles during market stress. When certain asset classes or sectors experience sharp declines, investors often respond by dramatically reducing exposure to these areas, effectively concentrating their portfolios just when diversification benefits are most needed.

​The recent tariff-related selloff provided a clear example. As trade-sensitive sectors like technology and manufacturing fell sharply, many investors shifted heavily toward defensive sectors and perceived safe havens. When sentiment subsequently improved and the initially hardest-hit sectors rebounded most strongly, these investors missed much of the recovery in precisely the areas that had the most ground to regain.

​This behaviour stems from recency bias – our tendency to overweight recent experiences when making decisions. After experiencing losses in a particular asset class, investors often project that recent performance forward, leading them to reduce exposure at exactly the wrong time.

​To maintain diversification discipline, consider establishing rebalancing triggers based on allocation thresholds rather than market events. For example, commit to rebalancing when an asset class deviates more than a specified percentage from its target allocation. This mechanical approach helps ensure you're buying assets that have declined and selling those that have appreciated – the essence of "buy low, sell high" – without requiring subjective judgements during emotional market periods.

How to avoid these common mistakes

​Understanding these mistakes is only half the battle – implementing strategies to avoid them is equally important. Start by creating an investment policy statement before market turbulence strikes. This document should outline your investment goals, time horizon, risk tolerance, and specific rules for portfolio adjustments, serving as a rational guide during emotional market periods.

​Limit your consumption of financial news during market selloffs. While staying informed is important, the dramatic headlines and urgent tone of market coverage can heighten anxiety and encourage impulsive decisions. Consider scheduling specific times to check market news rather than following developments continuously.

​Work with a trusted financial adviser who understands behavioural finance and can provide objective guidance during market stress. Having someone who can offer perspective and help maintain discipline can be invaluable when emotions are running high. If you prefer managing your own investments, consider sharing your investment policy with a trusted friend who can help hold you accountable.

​Automate as many investment decisions as possible to remove emotional triggers. Regular contributions, automatic rebalancing, and predetermined exit strategies can help maintain discipline regardless of market conditions.

How to navigate market selloffs effectively

1. ​Do your research on historical market corrections and recoveries to gain perspective on the temporary nature of most market declines. Understanding that selloffs are a normal part of market cycles can help maintain confidence.
2. ​Choose whether you want to trade actively or invest passively during volatility based on your temperament and track record. Most investors benefit from reduced activity during market stress.
3. ​Open an account with us to access tools and resources that can help manage portfolio risk during market volatility.
4. ​Search for opportunities to rebalance your portfolio, potentially adding to quality positions that have been disproportionately impacted by market sentiment rather than fundamentals.
5. ​Place your trades with position sizes that allow you to maintain your strategy even if markets continue to decline in the short term.

​Market selloffs test every investor's discipline and emotional resilience. By recognising these common mistakes and implementing strategies to avoid them, you can transform market volatility from a threat into a potential opportunity. Remember that market declines have always been temporary, while the long-term trajectory of well-diversified portfolios has consistently been upward.