How to Invest During a Market Downturn (Without Panicking)
When stock prices drop 20%, 30%, or 50%, every financial media headline screams alarm. The urge to sell everything and wait until it "recovers" feels overwhelming. This response is completely natural — and usually financially harmful.
Here's what the evidence says about investing during market downturns.
What Counts as a Market Downturn?
Correction: A 10-20% decline from a recent peak. Corrections are common — they happen roughly once a year on average.
Bear market: A 20%+ decline from a recent peak, typically lasting several months. Historically occurs every 3-4 years on average.
Crash: A rapid, severe decline (often 20%+ in days or weeks). The 2020 COVID crash dropped markets 34% in 33 days before recovering.
Recession: Two consecutive quarters of negative GDP growth. Markets often decline before recessions are officially declared and frequently start recovering before recessions end.
The Core Insight: Downturns Are Normal and Temporary
Every bear market in history has eventually ended with markets reaching new all-time highs. This has been true through the Great Depression, World War II, the dot-com crash (−49%), the 2008 financial crisis (−57%), the 2020 COVID crash (−34%), and every other major downturn.
The US economy grows over time. Corporate earnings grow over time. Stock prices, over sufficiently long horizons, reflect this.
The average bear market since 1926: lasted about 9.6 months and lost about 36% of market value. The average recovery: about 2.1 years.
The long-term outcome: An investor who bought the S&P 500 in January 2000 (just before the dot-com crash), held through the entire 2000-2002 crash and 2008-2009 crisis, would have roughly 5x their money by 2024. An investor who tried to time the market by selling during downturns would have significantly worse results.
What Happens When You Try to Time the Market
The danger of selling during a downturn isn't just that you lock in losses — it's that you also miss the recovery.
The best trading days tend to cluster around the worst trading days. In the 2020 COVID crash, markets plunged, then had their best single day in 87 years just days later.
JP Morgan research shows that from 2004-2023, missing the 10 best trading days of the S&P 500 cut average annual returns roughly in half. Missing the 20 best days reduced returns by two-thirds. Most of those best days occurred during or immediately after severe downturns.
This is why "just sell and wait for it to recover" usually fails: you sell near the bottom, miss the recovery, and buy back in after prices have already risen.
What You Should Do During a Downturn
Keep Contributing
If you're in the accumulation phase (still working, adding to investments), market downturns are actually favorable for buyers. You're buying shares at lower prices.
A 30% market decline means you're getting $1 worth of stock for $0.70. If you continue regular contributions (through payroll deductions to your 401k, for example), you're buying more shares per dollar than you were when prices were high.
Dollar-cost averaging — contributing a fixed amount on a regular schedule — naturally buys more shares when prices are low and fewer when they're high. Market downturns are when this works in your favor most dramatically.
Don't Look at Your Portfolio Daily
Checking your investment accounts daily during a downturn produces stress without producing useful information. Long-term investors (anyone under 50 with a 10+ year investment horizon) don't need to respond to short-term price movements.
Behavioral research consistently shows that investors who look at their portfolios infrequently get better returns than those who check frequently — because frequent checking leads to emotional decisions.
Rebalance Rather Than Sell
If a downturn has shifted your asset allocation significantly (e.g., your target is 80% stocks/20% bonds but now it's 70%/30% because stocks fell), rebalancing means buying more stocks and selling some bonds to restore your target. This is the opposite of the emotional response, and it's been historically advantageous.
Have Cash for Near-Term Needs
If you'll need money in the next 1-3 years (down payment on a house, college tuition, retirement starting soon), that money shouldn't be in stocks — regardless of market conditions. Market timing is unnecessary if your short-term cash needs are funded by cash and bonds, not equities.
Different Life Stages, Different Responses
20s and 30s (long investment horizon): Keep investing. A bear market is almost irrelevant to someone 30+ years from retirement. The shares you buy at depressed prices compound for decades.
40s and early 50s (10-20 years from retirement): Stay the course. Time horizon is still long enough that market recovery is highly probable before you need the money.
Within 5 years of retirement: This is where sequence-of-returns risk becomes real. A severe downturn right before retirement can significantly damage an undiversified portfolio. Having 1-2 years of expenses in cash/short-term bonds reduces the need to sell equities at depressed prices.
In retirement: Keep 1-3 years of living expenses in cash or short-term bonds. This allows you to avoid selling stocks during a downturn to fund living expenses. Equities can remain in the portfolio for the long-term growth you'll still need over a 20-30 year retirement.
What If the Downturn Is Different This Time?
Every bear market in history has been accompanied by credible arguments that "this time is different" — that this particular downturn represents permanent structural change rather than a temporary decline.
The Great Depression, the dot-com crash, the 2008 financial crisis, and the COVID crash all had compelling "this time is different" narratives. In each case, markets eventually recovered to new highs.
The base rate argument: diversified exposure to the global economy has recovered from every prior downturn. Betting against this recovery is betting that capitalism has fundamentally ended — a bold claim.
The One Time to Reconsider Your Allocation
If a market downturn reveals that you can't handle the emotional experience of watching your portfolio decline 30-40% without panicking, that's useful information about your actual risk tolerance — not your theoretical one.
If you genuinely cannot hold through significant volatility without selling, your allocation may have too much equity for your psychological comfort. There's no shame in a 60/40 or 50/50 portfolio if it means you'll actually stay invested through downturns rather than panic-selling.
What not to do: Don't change your allocation during a downturn (that locks in losses). Change your allocation during a calm market period by shifting to a more conservative allocation gradually.
Practical Checklist for Downturns
- ✅ Keep regular contributions going (don't stop 401k or Roth IRA contributions)
- ✅ Have an emergency fund so you don't need to sell investments for living expenses
- ✅ Avoid checking your portfolio balance daily
- ✅ Rebalance to your target allocation if it's significantly off
- ✅ Verify that money you need in 1-3 years is in cash/bonds, not stocks
- ❌ Don't sell in a panic
- ❌ Don't try to time the bottom ("I'll buy back in when it stops falling")
- ❌ Don't take out loans to invest more (leverage during volatility is extremely risky)
- ❌ Don't check your account balance multiple times per day
Investing during downturns is psychologically hard. The calm, counterintuitive response — keep buying, don't sell — is supported by decades of evidence, but it requires resisting strong emotional pressure. The investors who do this consistently are the ones who build long-term wealth.