The Real Policy Mistake Investors Should Avoid in a Bear Market

If you’re like most investors, you’ve probably been watching the market decline and wondering: “How bad can this get?”

The truth is that no one knows. That’s the honest answer.

Market declines are never fun—and this time is no different. In 2022, the bear market began in January and spiraled lower until it finally bottomed in October. Unfortunately, it appears (for the moment) that the 2025 version has us taking the express lane.

While many pundits and economists may be stating that a policy error by our political leadership is the cause, I want us to focus on the critical mistake you might be tempted to make right now. This mistake isn't happening in Washington. It's the one happening in your own mind.

🔻 Markets Are Falling Fast—And So Is Investor Confidence

What makes this moment especially challenging is how fast things are moving. Historically, bear markets take time to unfold—but recent years have proven that declines can accelerate dramatically in our always-on digital economy.

In 2020, markets plunged over 30% in just 33 days during the COVID crisis. It was one of the fastest bear markets in history—and also one of the fastest recoveries.

We’ve seen volatility before. And it’s normal to feel nervous. But the real danger now isn’t just the market decline—it’s what the decline may tempt you to do.

⚠️ The Temptation to “Sell Everything” Is the Real Policy Mistake

The major policy mistake I want to warn you about today isn’t from any political party—it’s the deeply human impulse to sell everything and go to cash when the headlines are screaming and your portfolio is shrinking.

If you’re not tempted to do this, kudos to you. But for many, there’s a small voice whispering:

“Maybe I should just get out for now. Sit this one out. Wait until things feel more stable.”

Behavioral finance has a name for this: loss aversion. We fear losses more than we appreciate gains. According to Nobel Prize-winning psychologist Daniel Kahneman, losses are felt twice as strongly as equivalent gains. In that state of fear, it’s easy to act rashly.

But here’s the truth: the urge to sell is usually strongest right before the market begins to recover.

📜 What History Tells Us About Staying the Course

Let’s look at just a few examples of how markets behave:

• After the 2008 financial crisis, the S&P 500 bottomed in March 2009. By 2013, it had doubled.

• During the COVID crash of 2020, the market dropped over 30%, only to recover all its losses in five months.

• Even during the Great Depression, those who stayed invested saw eventual recovery—though it took time and resilience. (Ok, I'm stretching here because no one wants another depression.)

“The stock market is a device for transferring money from the impatient to the patient.”— Warren Buffett

The market has never failed to recover from a downturn. The challenge is staying disciplined during the storm.

🧭 What Should You Do Instead?

Instead of reacting emotionally, consider these more thoughtful actions:

✅ Revisit Your Plan

Ask yourself: Has your time horizon changed? Has your risk tolerance shifted? If not, your plan may not need changing—just recommitting.

✅ Review Your Cash Reserves

Having 6–12 months of expenses in cash or short-term investments can give you peace of mind and reduce the pressure to sell long-term assets.

✅ Talk With Your Advisor

A financial advisor can offer perspective when emotions run high. You don’t have to go it alone.

✅ Look for Strategic Opportunities

Down markets offer chances to:

• Harvest tax losses to offset future gains

• Rebalance into stronger positions

• Roth conversions while assets are at lower valuations

• Deploy excess cash into growth assets

These moves require a steady hand—but they can create long-term value.

🧠 Remember: Wisdom Is Not Reactive

The best financial decisions are often the least exciting in the moment. They require patience, resilience, and trust—in your plan, your process, and your principles.

You don’t have to react to every headline or market swing. In fact, I would go so far as to say that zero investment decisions should be made based on media headlines.

It's ok to feel anxious when markets get volatile. It's a normal response. However, in times like these, the best policy isn’t changing everything—it’s avoiding the big mistake of abandoning a plan that was built for exactly this kind of environment.

Check out my related article: 👉 Dear Bear Market Investors

Investment advisory and financial planning services offered through Advisory Alpha, LLC, a SEC Registered Investment Advisor. Insurance, Consulting and Education services offered through Vertex Capital Advisors. Vertex Capital Advisors is a separate and unaffiliated entity from Advisory Alpha, LLC. All written content on this site is for information purposes only. Opinions expressed herein are solely those of Michael H. Baker, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation. This website may provide links to others for the convenience of our users. Michael H. Baker has no control over the accuracy or content of these other websites. Please note: When you access a link to a third-party website you assume total responsibility for your use of linked website. Links and references to other websites and third-party content providers are offered for your convenience. We do not necessarily prepare, monitor, review or update the information provided by third parties. We make no representation or warranty with respect to the completeness, timeliness, suitability, or reliability of the referenced content.