The Market Sold Off Hard. Then It Recovered Fast. Here's What That Cycle Tells You About Staying Invested Through the Next Crisis.

Earlier this year, the S&P 500 (SNPINDEX: ^GSPC) fell about 9%, while the Nasdaq-100 dropped 12%. It was the biggest decline for U.S. stocks in about a year and was triggered by the uncertainty over the war in Iran.

For many investors, it was a panic moment. Stock market corrections haven't been that common over the past few years, so the pain of seeing a loss in their investment values was no doubt very real. But while nobody wants to see the value of their accounts go down, how people react to that situation goes a long way in determining whether those short-term losses turn into long-term underperformance.

Investors who saw their investments decline over the past month and decided to get out before they risked further losses likely missed out on the entire rebound in April. In essence, they did the one thing behavioral finance experts tell you not to do: sell low and buy high (if they bought back in at all).

These types of market swings can teach us a lot about why it's important to maintain a long-term perspective and not give in to the temptation to make emotional decisions.

Image source: Getty Images.

Key takeaways

• The S&P 500 fell 9% and the Nasdaq-100 fell 12% through the latter part of March, driven by the war in Iran, rising oil prices, and inflation concerns.
• In April, both indexes staged rallies following a two-week ceasefire agreement.
• Investors who sold their stocks during the decline likely did long-lasting damage to their portfolio returns.
• Bank of America research shows that investors who miss the market's best days end up losing out on most stock market returns.
• Quick rebounds after sharp market declines are common. Most investors are better off just waiting things out.

The cost of selling low is significant

When people talk about long-term buy-and-hold investing, it's not just a platitude. Even in normal times, stocks are volatile. People need to understand that when they go in. They're usually fine with that when prices are going up. When prices go down, however, that's when you find out what a person's real risk tolerance is.

Studies have repeatedly shown that investors usually do damage to long-term returns by trying to time the market or sell when the market is declining. In the latter instance, they usually do the opposite of what they should. They sell low and fail to get back in before prices have already recovered. They're locking in losses while missing out on subsequent gains. And it's a recipe for poor returns.

Here's some of that research in real terms:

• UBS found that during past geopolitical conflicts where the S&P 500 dropped by 5% to 10% in a matter of weeks, it usually recaptured those losses within six months.
• Bank of America found that since 1930, a buy-and-hold investment in the S&P 500 would have returned more than 17,000%. If you missed the 10 best days in each decade, the total return drops all the way to 28%.

The general rule is that if stocks fall by around 5% to 10% due to a geopolitical disruption, they've demonstrated a historical ability to recover pretty quickly. This is because geopolitical events are usually short-term in nature and rebounds can also occur in the short term. If the stock market decline approaches 20% or more, the recovery period is usually longer.

S&P 500 & Nasdaq-100: Staying invested through the cycle

YTD = year to date.

The biggest lesson out of all of this is that nobody knows when conflicts like this will end. Nor do they know the timeline or potential impact. Because of this, it usually causes more harm than good when people try to trade their investments based on unknown factors.

In most cases, it's best to ride out short-term volatility and avoid the temptation to do something to your portfolio. As we've seen in 2026, the market can swing quickly. The investors who come out ahead are likely to be the ones who react the least.

Let that be a lesson for the next crisis.

Bank of America is an advertising partner of Motley Fool Money. David Dierking has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.