What to do and what not to do when the stock market drops sharply, with historical perspective on why staying invested matters.
- These shares will generate the most growth when the market recovers.
- If you contribute $500 per month to your retirement account, keep contributing $500 per month.
- If your portfolio should be 80% stocks and the crash has pushed it to 65%, rebalancing to 80% means buying stocks at discount prices.
Market crashes feel like the end of the world while they are happening. Your portfolio drops 20%, 30%, or more. Headlines scream about financial disaster. Your instinct tells you to sell everything and protect what is left. This instinct, while understandable, is one of the most destructive forces in personal finance. What you do during a crash determines more about your long-term wealth than almost any other financial decision.
What Not to Do
Do not sell. This is the single most important piece of advice. Selling after a sharp decline locks in your losses permanently. It transforms a temporary paper loss into a real, irreversible one. The market has recovered from every crash in history, often faster than expected, and investors who stayed invested participated in those recoveries. Those who sold missed them.
Do not stop contributing to your investment accounts. Your regular contributions during a downturn buy more shares at lower prices. These shares will generate the most growth when the market recovers. Pausing contributions during a crash is the opposite of what rational investing requires.
Do not check your portfolio obsessively. Watching your balance drop in real time creates anxiety and increases the temptation to sell. If daily monitoring causes you stress, check monthly or quarterly instead. The market’s daily movements are noise; the long-term trend is what matters for your financial future.
What to Do
Continue investing on your normal schedule. If you contribute $500 per month to your retirement account, keep contributing $500 per month. Dollar cost averaging works best during volatile periods because you buy more shares when prices are low.
Rebalance if your allocation has drifted significantly. A crash may have pushed your stock allocation well below your target. Rebalancing means buying stocks when they are cheap, which is exactly what every investor wishes they had done in hindsight. If your portfolio should be 80% stocks and the crash has pushed it to 65%, rebalancing to 80% means buying stocks at discount prices.
If you have cash on the sidelines, consider whether this is an opportunity to invest additional funds. You will not catch the exact bottom, and you should never invest money you might need in the near term, but historically, investing during a crash has been one of the best times to put money to work.
Historical Perspective
The U.S. stock market has experienced drops of 20% or more (the definition of a bear market) more than a dozen times since 1929. It has recovered from every single one. The 2008 financial crisis saw the market lose over 50%. By 2013, it had fully recovered and gone on to reach new highs. The 2020 pandemic crash saw a 34% drop in just over a month. The market recovered that loss in about five months.
Investors who sold during these crashes locked in devastating losses. Investors who stayed invested, or better yet increased their contributions, came out ahead. The pattern repeats with remarkable consistency, yet the emotional experience of each new crash makes it feel unprecedented and permanent.
Preparing for the Next Crash
Market crashes are not a matter of if but when. They are a normal, recurring feature of equity markets. Preparing in advance makes them far easier to navigate. Maintain an emergency fund so you never need to sell investments to cover expenses. Ensure your asset allocation matches your actual risk tolerance, not just your risk tolerance when markets are calm. Write down your investment plan and the reasons behind it, so you have something rational to refer to when emotions run high.
Accept that paper losses are the price of admission for long-term stock market returns. You cannot earn 10% average annual returns without accepting the periodic 30% declines that come with them. The returns are the reward for enduring the volatility.
Market timing is unreliable. All investments carry risk, including loss of principal. Past recovery from crashes does not guarantee future recoveries. See our financial disclaimer for important disclosures.
A worked example
Imagine investing $500/month for 30 years at an average 8% annual return. Total contributions: $180,000. Final balance: roughly $745,000. The first $180,000 is yours; the other $565,000 is compounded growth. Now imagine starting 10 years later - same $500/month for 20 years at 8%: contributions $120,000, balance $295,000. The 10 years cost you about $450,000 in foregone growth. Time in the market beats timing the market by an enormous margin.
Common mistakes to avoid
- Trying to time the market. Studies consistently show that missing just the 10 best market days over 20 years cuts returns roughly in half. You can't reliably know which days those will be.
- Picking individual stocks based on news or tips. By the time it's news, the price already reflects it. Index funds aren't exciting but they outperform most retail stock-picking by a wide margin.
- Panic-selling in a downturn. Selling locks in losses. Markets have always recovered. The investors who do worst are the ones who sell low and re-buy high.
Frequently asked questions
How much money do I need to start investing?
Less than you think. Most major brokerages (Fidelity, Schwab, Vanguard) have no minimum balance. Fractional shares mean you can buy a $1 slice of any stock or ETF. Realistically, $50-100/month into a low-cost index fund is enough to start building real wealth over decades.
Is it too late to start investing at 40, 50, or 60?
No - but the strategy changes. At 40 you still have 25 years of compounding ahead. At 50 the focus shifts to maximizing 401(k) contributions (you can contribute extra after age 50). At 60 it's about preserving what you have and shifting to a more conservative allocation. The worst day to start was 20 years ago; the second-best is today.
Should I invest in individual stocks or index funds?
Index funds for nearly everyone. Over 20-year periods, 80%+ of professional fund managers fail to beat the index - and they have PhD analysts and millions in research budgets. A target-date retirement fund or a total-market index ETF will outperform what almost any retail investor can do picking individual stocks.
What is the safest investment?
FDIC-insured savings accounts and CDs (up to $250,000 per bank per ownership type) and US Treasury bills/bonds are the safest. They won't make you rich but they won't lose principal. For real (inflation-adjusted) safety, TIPS and I-Bonds protect against inflation, which traditional bonds don't.
How much should I have in stocks vs bonds?
A starting heuristic is 'your age in bonds' - so a 30-year-old holds 70% stocks / 30% bonds. Many financial planners now suggest something more aggressive given longer lifespans: 110 or 120 minus your age in stocks. Target-date funds do this automatically based on your retirement year.
Where this guide fits in
This article is part of the Chase The Dollar editorial library of practical money guides. We update guides as rules and rates change. If you spot a mistake or want us to cover a topic, the contact form is the fastest way to reach us.