Should you hold, buy or sell during a market downturn?

One of the most common mistakes during market declines is allowing emotion to override logic. Getty Images

Uncertainty is never a welcome guest in financial markets. But it is, inevitably, a frequent one. As markets around the globe wobble on the back of geopolitical tensions, inflationary stickiness and persistent interest rate pressures, investors are once again faced with the age-old question: should you hold tight, buy more, or start trimming your positions?

The answer is not a one-size-fits-all solution. But history, data and disciplined strategy offer some clarity.

Understanding where we stand

As of the second quarter of 2025, global equities are navigating a rough patch. Major indices have pulled back from recent highs, with the S&P 500 down more than 10 per cent from its January peak and the Nasdaq sliding into correction territory.

Oil prices, a key economic barometer especially in the Gulf region, are fluctuating in the $58 to $65 per barrel range. Meanwhile, regional markets have shown relative resilience, with the Dubai Financial Market slipping only about 4.5 per cent in the year to date, while Saudi Arabia’s Tadawul index has seen closer to a 7 per cent decline.

While discomforting in the short term, such downturns are not unusual. Over the past century, US markets have experienced corrections – defined as a decline of 10 per cent or more – roughly every two years. Despite these fluctuations, the long-term trajectory of equities has been upwards, with the S&P 500 delivering an average annual return of around 10 per cent over the past 60+ years.

The power of staying put

One of the most common mistakes during market declines is allowing emotion to override logic. Investor behaviour studies consistently show that panic selling leads to underperformance. For example, a study by Dalbar revealed that over a 20-year span, the average equity fund investor earned significantly less than the market itself – around 6.8 per cent annually compared to the market’s 9 per cent – due largely to mistimed entries and exits.

Staying invested through the turbulence, rather than reacting impulsively, tends to yield better results. Markets often recover faster than expected, and the biggest gains frequently come shortly after the steepest losses. Missing just a handful of the market’s best days can dramatically reduce long-term returns. For investors with diversified portfolios and a long-time horizon, holding steady is often the most prudent course of action.

When downturns turn into opportunities

While holding may be a defensive strategy, downturns can also present compelling opportunities to accumulate high-quality assets at discounted prices. Valuations have become more attractive in many sectors, with the forward price-to-earnings ratio of the S&P 500 falling below its 10-year average. Investor sentiment, as reflected by volatility indices like the VIX, has spiked to levels that historically precede recoveries.

This environment can favour disciplined buying – especially through strategies like dollar-cost averaging, which smooth out entry points over time. Rather than attempting to catch the absolute bottom, which is nearly impossible, gradually increasing exposure to markets during pullbacks can improve long-term outcomes. Sectors that have recently underperformed, such as technology and consumer discretionary, may be poised for recovery when market sentiment shifts.

Strategic selling

Though knee-jerk selling is rarely advisable, there are scenarios where reducing exposure makes sense. Investors may choose to sell assets if their portfolio has drifted from its target allocation, or if the fundamentals of a company have materially changed. For example, a business that repeatedly misses earnings estimates or is facing structural challenges may warrant a reassessment.

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In some jurisdictions, tax-loss harvesting – selling losing positions to offset gains elsewhere – can be an effective tool, though this strategy is largely irrelevant in tax-free environments like the UAE.

However, reallocating from underperformers into more promising assets, or simply taking profits in overvalued holdings, can be a sound strategy in any market.

Investing from the UAE

Investors based in the UAE are uniquely positioned. With no capital gains tax and increasing access to both global and regional markets, long-term wealth creation is more accessible than ever. Market reforms and growing investor participation have made platforms like the Dubai Financial Market and Abu Dhabi Securities Exchange more efficient and transparent.

Moreover, the regional initial public offering landscape continues to show strength. Recent listings such as Parkin and Spinneys demonstrate the appetite for quality assets, even amid global uncertainty. Investors who stay engaged – and liquid – can benefit from such opportunities when they arise.

Focus on time in the market

Ultimately, the most important takeaway is this: the greatest investment returns are earned over time, not through timing. The temptation to exit during periods of fear is understandable but often misguided. A well-constructed portfolio, grounded in fundamentals and tailored to your goals, can weather short-term volatility and emerge stronger.

In every downturn lies the seed of the next rally. The challenge is to stay rational, informed and disciplined while the noise is loudest. That’s where real investment success begins.

George Khoury is global head of research and education at CFI Financial Group