You can’t catch a falling knife in the stock market. This is of course an important axiom to follow. But also, as someone who managed tons and tons of traumatic hand injuries in training, don’t try this is real life either.

All joking aside, I hear people repeat this investing phrase all the time. But then I still see them invest in the way that the axiom tries to warn against. Either because they misunderstand its actual meaning. Or they just can’t overcome the behavioral instincts that lead many investors to make poor decisions.

Let’s get right to the heart of this one so we all don’t make the same mistake…

What led me to write this post?

First, I want to share some context.

I’m writing this post on the Monday after Trump announced his widespread “reciprocal” tariffs. After the announcement, the stock market fell precipitously on Friday. And then there was the weekend, when trading obviously halted.

However, concern about the stock market and its falling knife did not abate over the weekend. Instead, fear ran rampant. Tons of people talked, blogged, and commented about how the market was going to plunge more and a depression was imminent.

As a result, many investors wanted to sell their stocks. To put their nest egg in cash to protect it during this downturn in the market.

In essence, these investors wanted to try to catch the falling knife in the stock market.

What does it mean in investing to catch a falling knife?

When the stock market plummets, whether in isolation, as part of a downturn, or even in a bear market, it can be tempting to try and pull money out of the market. This avoids the loss in value that would occur by leaving your money in the market. Then, when the market rebounds, you start investing again. Thus you enjoy future gains while avoiding present losses.

It sounds like a great strategy. And it is!

And that is how most investors commonly interpret this axiom. That they need to wait for the market bottom before investing their money again after taking it out during a market drop. In fact, that’s even how Investopedia defines it.

But it’s wrong. Because it misses a very important point.

It requires a functioning crystal ball

And none exists.

In fact, as I write this post on Monday April 7, 2025 at 10:30 AM ET, I just checked the market. When I started writing this post 30 minutes ago, the S&P 500 was up 2%. And now? It’s down 1.5%!

The market is fickle and unpredictable at a rate greater than that expected by luck. That much has been proven time and time again.

It’s why passive investing via low cost, broadly diversified index funds works better more than 80% of the time.

But there’s an even bigger issue…

Active stock market investing strategies do worse when the knife is falling

A quick question for you to think about: When would you want predictions to be more accurate – when the stock market and economy are up or when they are down?

If you are like most of us, accurate forecasts during market downturns are more important. Both because, as humans, we feel losses more than we feel wins, and because a 1% error in accuracy for a growth market doesn’t make as much of a tangible difference as such an error when the market is down.

So, do forecasters do better or worse when the economy is down?

Worse…they do worse.

Much of this data comes from William Sherden who is an author and professor at Stanford Business School. I first came across his work in The Quest for Alpha by Larry Swedroe.

Sherden analyzed the leading research on forecasting accuracy from 1979 to 1995 and forecasts made from 1970 to 1995. 

First and foremost, I recognize that this data is old. But it is still some of the best that we have. And more over, a forecast in the past should be as good as a forecast in the future. Sure, technology changes. But that should not significantly impact our forecasting in the economy and market (more on this below).

With this in mind, let’s take a look at some of the big findings from this particular study:

1. Of 48 predictions made by economists, 46 were wrong. That’s a whopping 0.042 batting average. If these predictions were a baseball player, they’d be sent back to Little League ASAP.
2. When the “experts of the experts” were examined, including the Federal Reserve and Congressional Budget Office, their forecasting records were worse than pure luck would dictate.
3. No particular forecasting or economic strategy produced consistently better predictions.
4. Even more, no one expert consistently produced more accurate predictions.
5. Forecasts made via consensus committee of multiple experts did not better than individuals.
6. Psychological bias plays a role as some experts were consistently optimistic while others were consistently pessimistic.
7. And lastly, increased sophistication in the prediction models did not improve accuracy.

And what’s more…forecast accuracy was worse at the turning points of the economy

This finding was further confirmed in a 2009 study by economist Michael W. McCracken. He reviewed 26 years of quarterly forecasts made by members of the Survey of Professional Forecasters from 1981 to 2007. 

Ultimately, he found that forecasting errors were four times (four times!) less accurate during a recession compared to when it was not.

Ouch.

In the words of the man himself…

Sherden observes the following:

“Despite recent innovations in information technology and decades of academic research, successful stock market prediction has remained an elusive goal. Overall, we have not made progress in predicting the stock market.”

He goes on to advise the investor as such:

“Avoid market timers, for they promise something they cannot deliver. Stop asking yourself and everyone you know, ‘What’s the market going to do?’ It is an irrelevant question, because it cannot be answered.”

And just to drive the point home

The media does even worse than experts. This seems like common sense. But yet millions of viewers still tune into the MSNBC and other finance/business programs hoping to learn some nugget that will provide them with superior market returns.

Philip Tetlock, a professor at Berkeley, Worte a book sharing findings of his 20-year study in which experts were asked to predict the future.

I will spare you all of the findings, however, Tetlock finds that all experts, but especially public ones in the press or doing consulting, do no better than a chimp throwing darts. They are just louder and more widely broadcast.

So, if we can’t predict when the market will bottom out, what should we do?

Well, we shouldn’t try to predict it then. Because you can’t catch a falling knife in the stock market. That much is obvious in a vacuum.

However, there are emotions and money at stake. That’s why the behavioral aspects of personal finance matter so much more than the analytics. Sure, we understand it’s better not to try and sell and buy back in and out of a down market mathematically. But when we see our portfolio dropping precipitously, it’s hard to do nothing.

But that is exactly what I am asking you do to. I am asking you to do nothing. Ride it out. Keep calm and keep investing according to your written financial plan.

Why is this the best course of action?

Because, if no one knows when the market will bottom out, then no one knows when the market will rise again. And if you are sitting on the sidelines because you got out of the market, you will be too late by the time you jump back in.

Further, when the knife is falling in the stock market, that means that stocks are cheap to buy.

It also means that when the market does inevitably rise again, those stocks with the lowest basis (the lowest purchase price) will rise the most. So, if you plan to invest more into the stock market, a down market is actually a pretty good time to do so.

More often though, investors will be continuously investing into the market on a regular basis via monthly despots, etc. This is colloquially called dollar cost averaging. If this describes your situation, I highly encourage you to keep doing so. Through up and down markets. But even when the knife is falling.

This will be the most successful strategy. Even if it seems counterintuitive during the time you are doing it!

To help understand the stock market and the best investing strategies, check out these resources:

• Stress Free Stock Market Investing Is Easier Than It Seems!
• 3 Helpful Tips to Navigate the Recent Stock Market Volatility
• Understanding the Stock Market: Firm Foundation vs. Castle in the Air Theories
• Is a 401k Worth It Anymore for Doctors?
• What’s Better? Should You Pay Off Debt or Invest?

What do you think? Can you catch a falling knife in the stock market? Have you tried? How did it go? Let me know in the comments below!