Investing During Market Crashes: What to Do When the Market Drops

Investing during market crashes is where long-term wealth is made. Every major crash in history has been followed by a recovery that more than erased the losses. The investors who bought during the 2009 crash, the 2020 COVID drop, and every correction in between made extraordinary returns. The investors who sold locked in permanent losses.

This guide covers what to do, what not to do, and exactly how to think about market crashes if you want to come out ahead.

What History Tells Us About Market Crashes

The S&P 500 has dropped more than 20% (a bear market) 12 times since 1950. Every single time, it has fully recovered and gone on to set new highs. The average recovery time from a bear market bottom to prior highs is about 2 years.

The 2008 financial crisis saw the S&P 500 drop 56%. By 2012 it had fully recovered. By 2023 it was nearly 600% above the 2009 low. The 2020 COVID crash dropped 34% in 33 days. It fully recovered in 148 days. Both crashes felt catastrophic in the moment. Both rewarded investors who stayed in or bought more.

What to Do When the Market Crashes

Keep investing on schedule

If you invest automatically every month, do not stop during a crash. The money you invest at 20% below prior highs buys more shares at a lower price. When the market recovers, those shares appreciate to full value and beyond. Stopping investments during a crash is like refusing to shop during a sale.

Buy more if you have cash available

Market crashes are the best buying opportunities that exist in public markets. If you have cash sitting in a savings account beyond your emergency fund, a 20%+ crash is exactly when to deploy it. You are not predicting a bottom. You are buying quality assets at a discount to where they were recently trading.

Rebalance your portfolio

A crash shifts your portfolio allocation. If you started at 80% stocks and 20% bonds and stocks drop 30%, you are now closer to 70/30. Rebalancing means selling bonds (which held value) and buying stocks (which are now cheaper) to restore your target allocation. This mechanical process forces you to buy low.

Review but do not react

Check your portfolio during a crash. Understand what you own and why. If you are properly diversified in index funds, nothing has fundamentally changed about the businesses you own. The prices are lower because investors are scared, not because the underlying earnings power has disappeared.

What Not to Do During a Market Crash

• Sell in a panic - Selling during a crash converts a paper loss into a permanent real loss. You cannot benefit from the recovery if you are not in the market.
• Check your portfolio every day - Daily monitoring during volatility triggers emotional reactions that lead to bad decisions. Check monthly at most.
• Move everything to cash - Timing the market requires being right twice: when to get out and when to get back in. Most investors who move to cash miss the recovery.
• Stop your automatic contributions - This is the worst time to pause dollar-cost averaging. You are buying shares at the exact moment they are cheapest.
• Try to predict the bottom - Nobody knows when the bottom is until it has passed. Buy on the way down and you will average into a great price even if the market falls further.

Why Most Investors Underperform During Crashes

Studies consistently show that the average investor earns significantly less than the index they invest in. The gap exists almost entirely because of emotional selling during downturns and waiting too long to re-enter after a crash.

The S&P 500 has returned approximately 10% annually over the long run. The average investor has earned closer to 4 to 5% annually because of timing mistakes. The solution is mechanical: automate contributions, set an allocation, rebalance annually, and ignore the noise.

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