Over the weekend, trade talks between U.S. and Canadian negotiators collapsed. President Donald Trump immediately slapped 50% tariffs on a wide range of Canadian products, including Canadian whiskey and hockey sticks.
Canadian Prime Minister Mark Carney said that Canada would match Trump’s tariffs “dollar for dollar.” In response, Trump further escalated the trade war by doubling tariffs on imported automobiles and auto parts from Canada to 50%.
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Unsurprisingly, the S&P 500 (SNPINDEX: ^GSPC) opened lower on Monday. The trade war comes at a fragile time for the market: More investors are bearish than bullish, according to data from the American Association of Individual Investors.
If the trade war continues to escalate, it could easily trigger a market downturn or even a major crash. But if that happens, how should stock market investors react? Well, history shows that during a downturn, there’s one thing investors should do to succeed over the long term.
Here’s what history says to do first
It may sound counterintuitive, but history says the first thing investors should do in the event of a market crash is:
Nothing.
You read that right. The temptation is to react quickly, getting out of the market before it falls even further. But making rash moves like this has historically set investors up to fail.
Selling stocks after a crash has already begun often means selling them at a loss. Even investors who move quickly will be selling at a sub-optimal price.
Instead of panic-selling, an investor should take a deep breath and do nothing. At least at first.
Why it’s historically been the best thing to do
An investor who sells their stocks when they’re down 25% can pat themselves on the back if the stocks eventually go down 50%, but that satisfaction may be short-lived.
Usually, an investor who panic-sells during a crash waits before getting back in. If the crash ushers in a recession, they may wait until the recession is over.
But research from The Motley Fool shows that the stock market usually starts making big gains before the end of a recession. Investors who kept their money in stocks during recessions almost always had better long-term returns than investors who pulled their money out.
For example, take a look at the COVID-19 crash of 2020: If you’d bought an S&P 500 index fund on Jan. 23, you’d have lost almost one-third of your money just two months later:
