Should You Touch a Model Portfolio in a Market Fall?

When markets fall, most investment mistakes are caused not by the market but by how investors react to it. Fear and regret drive headline-led decisions that rarely match the risks the portfolio was built to carry.

This paper sets out a simple rules-based framework: hold through normal drawdowns, and act only for one of two defined exceptions, a market-level regime change or a stock-level breakdown in quality, so that decisions are made in advance rather than under stress.

Key findings

• The primary stance is to hold through normal market drawdowns, because those losses are already built into a portfolio's historical statistics.
• Rule one: normal falls mean do nothing. Choppiness, rate moves, headlines and isolated positions falling are expected.
• Exception one is a market-level regime change, when momentum breaks and major indices enter sustained downtrends. Stepping to cash is for investors with low risk tolerance when the trend confirms it, not for daily headlines.
• Exception two is a stock-level breakdown (a “Daddy Bear”): confirm deterioration in earnings, cash flow or competitive position before removing or replacing the holding.
• Pre-set exit rules, defined loss limits and position sizes, and choosing the least regrettable long-term path reduce emotional timing and unforced errors.

What the paper covers

1. The real question and why rules matter
2. Hold model portfolios, with two exceptions
3. Rule one: normal falls mean do nothing
4. Exception A: market-level regime change
5. Exception B: managing a stock-level breakdown
6. A practical rule of thumb for investors
7. Why this framework works