Staying the Course
Everything up to this point — building a cash cushion, paying off debt, picking the right accounts and low-cost funds — is the easy part. The hard part is not doing something stupid when the market drops 30%.
This page is about the behavioural side of investing. It might be the most important page in this guide.
Market Drops Are Normal
The share market doesn’t go up in a straight line. It has always experienced regular, significant drops — and it has always recovered. The table and chart below use the US share market, which has the longest records:
| Drop size | How often (roughly) | Historical examples |
|---|---|---|
| 10%+ correction | Every 1-2 years | Happens so often it barely makes the news |
| 20%+ bear market | Every 4-6 years | COVID crash (2020), 2022 (about −25%) |
| 30%+ severe bear | Every 8-12 years | Financial crisis (2008-09), dot-com bust (2000-02) |
| 50%+ crash | A few times per century | Great Depression, 2008-09 at its worst |
These drops are the price of admission for long-term share market returns.
Australia and New Zealand have had their own crashes:
- New Zealand, 1987: the share market lost 4.3% of its value in four hours on “Black Tuesday” (20 Oct 1987), and share values halved over the next 10 months (Te Ara).
- Australia, global financial crisis: shares fell 54% from November 2007 to March 2009 (RBA). The ASX 200 price index took over a decade to get back to its pre-crisis level, in July 2019 (The New Daily). With dividends reinvested, it recovered far sooner. That’s one more reason to own the world, not just your home market.
- Australia, COVID-19: the ASX 200 fell 35% between 20 February and 23 March 2020, then was back at its February 2020 level just over a year later (RBA).
Every major crash was followed by full recovery and new highs. US share market (S&P 500) data; Australian and NZ crashes are listed above the chart.
What to Do During a Downturn
- Nothing. Do not sell. Do not “move to cash.” Do not “wait until things settle down.”
- Keep contributing. A downturn means you’re buying at lower prices. This is good.
- Lean on your cash cushion. If you lose your job or have an unexpected expense during a downturn, that’s exactly what your cash cushion is for. It covers your expenses so you never have to sell investments at the worst possible time.
- Don’t look at your portfolio. Check it once a quarter at most.
- Reread this page. You wrote (or read) a plan when you were thinking clearly. Trust the plan.
Imagine you invest $10,000. The market drops 30% — your portfolio is now $7,000. You panic and sell.
Three months later, the market bounces back 20%. If you’d stayed invested, your $7,000 would be $8,400 — on its way to recovery.
But you sold at $7,000 and put it in savings. The market keeps rising. You wait for a dip. The dip doesn’t come. Eventually you reinvest at $9,500. You turned a temporary 30% drop into a permanent 5% loss — plus all the gains you missed.
This is the most common way individual investors destroy their own returns.
The Biases Working Against You
Your brain is wired for survival, not investing. Several deeply ingrained cognitive biases make it feel rational to do exactly the wrong thing:
Loss Aversion
Losing $1,000 feels about twice as painful as gaining $1,000 feels good. This pain drives you to sell to make the pain stop — even though selling locks in the loss permanently.
Recency Bias
Whatever happened recently feels like what will keep happening. After a crash, it feels like the market will keep falling forever. After a bull run, it feels like shares only go up. Neither is true.
Herding
When everyone around you is selling, it feels irresponsible not to sell. The crowd is usually most enthusiastic at exactly the wrong time (market peaks) and most fearful at exactly the wrong time (market bottoms).
Overconfidence
After a few good years, it’s easy to believe you have a talent for timing markets. Professional fund managers with teams of analysts mostly fail to beat a simple index fund: 89% of Australian Equity General funds trailed the S&P/ASX 200 over 15 years (to 30 Jun 2026). Humility is a genuine edge.
Behavioural Safeguards
Knowing about biases isn’t enough — you need systems:
- Write down your investment plan. Include your target allocation and what you’ll do during a downturn (nothing). Tape it somewhere visible.
- Automate your contributions. Money that moves automatically never passes through your hands.
- Set a 48-72 hour cooling-off rule. If you feel a strong urge to change your portfolio, write it down and wait 3 days.
- Limit how often you check. Once a quarter is plenty. Daily checking is harmful.
- Have an accountability partner. An outside perspective during emotional moments is invaluable.
A Longer View
Over the long run, share markets have kept climbing through the Great Depression, World War II, multiple recessions, the dot-com crash, the financial crisis, and a global pandemic. Every crash above was eventually followed by new highs.
The investors who came out ahead weren’t the clever ones. They were the ones who didn’t sell.
The returns are there for anyone willing to endure the drops. The market rewards patience and punishes impatience.
This guide is for informational purposes only and is not financial advice. Read the full disclaimer.