If the $1.3 Trillion Chip Stock Sell-Off Was a Warning for the S&P 500, History Repeatedly Suggests 1 Move to Avoid

Semiconductor and artificial intelligence (AI) stocks seem to be getting a break from a particularly rough sell-off recently. From July 24 to July 28, based on FactSet data shared by CNBC, 20 of the world's most valuable chip stocks lost $1.3 trillion.

Two faces of the AI stock trade, Nvidia and Micron Technology, lost $238 billion and $113 billion in value, respectively, during that time. Trading for the S&P 500 (SNPINDEX: ^GSPC) wasn't entirely unaffected by the sell-off in the chip sector, but it held up relatively well compared to some of the losses of tech-heavy indexes. That said, if the recent routing of the chip sector was an early warning that trouble is brewing that could seep into the broader markets, history repeatedly suggests there's one move to avoid.

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The worst move to make during a sell-off

Time and time again, history shows that panic selling and knee-jerk reactions can limit long-term gains. That's because, surprisingly, some of the best days for investing are during bear markets.

From 1996 to 2025, 48% of the 50 best days for the S&P 500 occurred during bear markets, according to the Hartford Fund. Of those 50 days, 28% of the best days were during the first two months of a bull market, while only 24% were during the rest of a bull market.

Taking a deeper dive, missing even just some of those best days becomes costly. As a hypothetical investment, $10,000 invested in the S&P 500 during 1996 would be worth a little over $192,000 by 2025. Just missing the 10 best days, however, drops that down to $85,490. Missing 20 of the best days reduces returns to $49,551, and missing the 30 best days would leave you with $31,123.

What to do instead

One way to help avoid making rushed decisions is to already own high-conviction stocks and limit the amount of speculative positions held. That way, it's less likely that the feeling of forced pressure to sell bubbles to the surface if stock prices start plunging. Keeping high-conviction positions instead of panic-selling also helps ensure some of the market's best potential days aren't missed.

What those high-conviction positions will be, however, depends on each investor. But it could include owning consumer staples and Dividend Kings -- stocks that have raised their dividends for 50 consecutive years or more. Dividend Kings are known for financial stability and consistently paying out income, no matter what's happening in the broader markets. And for consumer staples, people will always keep shopping for essentials, even if the stock market is in turmoil.

Jack Delaney has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Micron Technology and Nvidia. The Motley Fool has a disclosure policy.