3 Smart Choices When Stock Markets Fall (Warren Buffett Approved)

The quick scan: Monday delivered another chapter in what's becoming the most impressive record-setting streak of 2025, with the S&P 500 eking out its sixth consecutive record close despite choppy trading that had investors feeling like they were riding a financial roller coaster with a very gentle final drop. The NASDAQ continued its stellar run with its 16th record close of the year, while the Dow took a modest breather, proving that even in a bull market, not everyone can be the star of the show every single day.

• S&P 500: Edged slightly higher to notch its 15th record close of 2025, extending its winning streak to six sessions with the determination of someone who refuses to let a good thing end
• Dow Jones: Slipped 64 points (0.1%) but remains tantalizingly close to its first new high since December, like a runner who can see the finish line but needs one more push to cross it
• NASDAQ: Rose 70.27 points (0.3%) to close at 21,178.58, marking its fourth consecutive record and proving that tech stocks are having their moment in the sun

What's driving it: The U.S.-EU trade deal announcement provided the primary catalyst, with investors celebrating the prospect of reduced trade tensions and improved economic cooperation. This sets up July as the NASDAQ's most prolific month for new highs since December 1999, which is either very encouraging or slightly terrifying depending on your historical perspective.

Bottom line: Monday's performance showcased the market's ability to grind higher even during choppy trading sessions. When two indices can hit records while the third takes a breather, it usually signals underlying strength rather than speculative froth.

Stay Calm and Think Through Your Choices When Markets Fall

The scoop: Here's a reality check that might save your portfolio the next time markets decide to throw a tantrum: The Smart Investor's David Kuo recently outlined the three simple choices every investor faces during market downturns, and spoiler alert—none of them involve panic-selling everything and hiding under your bed. As an "unashamed long-term investor" who believes there are no legal get-rich-quick schemes, Kuo's approach is refreshingly practical in a world where financial advice often sounds like it was written by someone who thinks volatility is just a fancy word for "exciting."

The timing of this advice is particularly relevant given that we're currently enjoying a record-setting bull market run. But as Kuo wisely notes, "stock market declines are not uncommon" and "the causes might be different each time, but stock markets always recover." It's the financial equivalent of knowing that winter always follows summer—inevitable, predictable, and something you should prepare for rather than be surprised by.

The three choices when markets fall:

Hold Out and Wait for Recovery This is the "steady as she goes" approach that requires the emotional fortitude of a meditation master and the patience of someone who actually enjoys watching paint dry. Kuo's logic is beautifully simple: companies exist by making profits, and good companies with competent management should see their profits improve over time, regardless of short-term market hiccups.

The key insight here is understanding what drives share prices: they're the product of earnings per share multiplied by the price-to-earnings (PE) ratio. While earnings don't fluctuate minute by minute, PE ratios can swing wildly based on sentiment—and as Kuo bluntly states, "sentiment should have no place in investing." If the company's earnings haven't changed, neither should your investment thesis.

Sell and Head for the Hill Before you dismiss this as the coward's way out, Kuo identifies legitimate reasons to sell: when a company's outlook has deteriorated significantly, when management can't address fundamental business issues, or when you've reached a life stage where less volatile investments make more sense (hello, retirement planning).

The crucial point is that selling should be a strategic decision based on changed circumstances, not an emotional reaction to market volatility. Kuo emphasizes reviewing why you bought the stock in the first place and determining whether anything fundamental has changed. If you've been properly rebalancing your portfolio based on your age and risk tolerance, you shouldn't need to make dramatic moves during market downturns.

Buy More Stocks (The Warren Buffett Special) This is where Kuo channels his inner Warren Buffett, noting that market drops can be "great opportunities to buy shares" if you have available cash and are buying quality companies. The strategy, known as "averaging down," reduces the average price of shares you already own—but only makes sense if those shares represent good companies that have temporarily fallen out of favor.

Kuo includes several classic Buffett quotes that perfectly capture this mindset: "When it is raining gold, reach for a bucket, not a thimble" and "Uncertainty is the friend of the buyer of long-term values." The key distinction? "A good company does not become a bad company just because its shares have fallen. But cheap rubbish will always be rubbish."

The psychology of market downturns

What makes Kuo's advice particularly valuable is his recognition that different investors will have different optimal strategies based on their financial positions and life stages. There are no "hard and fast rules that will apply to everyone all the time," which is refreshingly honest in a world where financial advice often comes with one-size-fits-all solutions.

The article also touches on the importance of focusing on fundamentals rather than market sentiment. Share prices are "leading indicators" that reflect market expectations about future performance, but those expectations can be influenced by emotion, speculation, and short-term thinking that has little to do with a company's actual prospects.

Historical perspective

Kuo concludes with a Mark Twain quote that perfectly captures the cyclical nature of markets: "History doesn't repeat itself, but it always rhymes." Market declines feel unique and terrifying when you're living through them, but they're actually a normal part of the investment cycle. Understanding this pattern doesn't make downturns pleasant, but it can help you respond rationally rather than emotionally.

Actionable Takeaways:

• Develop your market downturn playbook now: Before the next market decline hits, decide which of the three strategies (hold, sell, or buy) makes most sense for your situation. Having a predetermined plan removes emotion from the decision-making process when markets are volatile.

• Focus on earnings, not sentiment: When evaluating whether to hold or sell during a downturn, ask yourself whether the company's fundamental earning power has changed. If the business is still profitable and well-managed, temporary share price declines may represent opportunity rather than disaster.

• Keep cash reserves for opportunities: If you're in a position to buy during market downturns, maintain some cash reserves specifically for this purpose. This "dry powder" allows you to take advantage of temporary price dislocations in quality companies you've been wanting to own.

• Review your original investment thesis: For each holding in your portfolio, write down why you bought it and what would need to change for you to sell. This exercise helps you distinguish between temporary market volatility and fundamental business deterioration.

• Align your strategy with your life stage: If you're approaching or in retirement, your response to market downturns should be different from someone with decades until retirement. Make sure your portfolio allocation reflects your actual risk tolerance and time horizon, not just your theoretical comfort with volatility.

• Practice "averaging down" carefully: If you choose to buy more shares during a decline, make sure you're adding to positions in companies you genuinely believe are temporarily undervalued, not just trying to "catch a falling knife" because something looks cheap.

Your Turn: When markets inevitably experience their next significant decline, which of these three strategies do you think you'll be most likely to employ?
Are you someone who has the temperament to hold steady during volatility, or do you find yourself more tempted to either cut losses or double down when prices fall?
Have you ever successfully "averaged down" during a market decline, or have you learned the hard way that not all cheap stocks are bargains?
Drop a comment below and share your approach to market downturns—I'm curious whether people's actual behaviour during volatile periods matches their theoretical investment philosophy!