What to do during a market crash

While it's impossible to predict when the next downturn will occur, history has shown us that they are a normal - and inevitable - part of the investment cycle.

The key to not just surviving, but potentially thriving, during these periods lies in having a plan and sticking to it. Here’s a guide to what you should do—and what you should avoid—during a market crash.

1. Don't Panic and Don't Sell

This is the golden rule of investing in a downturn. The feeling of fear and the desire to "get out" are powerful psychological forces. But selling off your investments when prices are low locks in your losses permanently. You turn a temporary dip into a real and irreversible financial setback.

Remember the lessons of history. From the Great Depression to the 2008 financial crisis and the 2020 pandemic crash, every major downturn has been followed by a recovery. The stock market, over the long run, has shown a remarkable ability to rebound and reach new highs. By staying invested, you ensure that you are in a position to capture the eventual recovery.

2. Assess Your Financial Situation

Before you make any moves, take a deep breath and review your personal finances.

• Emergency Fund: Do you have an adequate emergency fund? A cash cushion of 3-6 months' worth of living expenses is crucial. This fund ensures you won't be forced to sell your investments at a loss to cover an unexpected expense like a job loss or a medical emergency.
  
  

• Time Horizon: How long do you have until you need the money? If you're a young investor with decades until retirement, a market crash is a blip on your financial radar. You have plenty of time for your portfolio to recover. However, if you are nearing or in retirement, a more conservative portfolio with a larger allocation to bonds and cash is generally more appropriate.

3. Rebalance Your Portfolio

A market crash can throw your asset allocation out of whack. A portfolio that was once 70% stocks and 30% bonds might now be closer to 60% stocks and 40% bonds because of the decline in equity value.

A downturn is an ideal time to rebalance. This involves selling some of the assets that have held up well (like bonds) and using the proceeds to buy more of the assets that have fallen in value (like stocks). This strategy, which is the very definition of "buying low and selling high," helps you realign your portfolio with your original risk tolerance and investment goals.

4. Consider Dollar-Cost Averaging

For long-term investors, a market crash is not a catastrophe; it's a sale. If you're consistently contributing to a retirement account or a brokerage account through a strategy like dollar-cost averaging, you are automatically taking advantage of lower prices.

Dollar-cost averaging means investing a fixed amount of money at regular intervals, regardless of market conditions. When the market is down, your fixed investment buys more shares, lowering your average cost per share over time. This disciplined approach removes emotion from the equation and can lead to significant gains when the market inevitably recovers.

5. Seek Opportunity, Not Panic

While the headlines are filled with doom and gloom, savvy investors see opportunity. A market crash can bring down the price of high-quality, fundamentally sound companies alongside overvalued or speculative ones.

Take the time to identify companies with strong balance sheets, consistent profits, and a long-term competitive advantage. These are the businesses that are most likely to weather the storm and emerge even stronger. A downturn can be an excellent time to add to your positions in these companies at a significant discount.

The Bottom Line

A market crash tests an investor's resolve and emotional discipline. It's a reminder that investing is a marathon, not a sprint. By focusing on your long-term goals, avoiding impulsive decisions, and sticking to a well-thought-out plan, you can turn a period of fear and uncertainty into a powerful opportunity for future growth.