Should You Invest During a Market Downturn?

Key Takeaways:

• A market downturn isn’t necessarily a reason to change a long-term investment strategy.
• Your time horizon, cash needs, risk tolerance, and financial goals should guide investment decisions during volatility.
• A well-designed financial plan can help you avoid panic selling and stay focused on your long-term goals.

One of the most interesting things we’ve observed over the course of our careers is how people’s risk tolerances tend to change over time. This is especially true when the markets fall. 

When things are going well, most investors aren’t spending much time wondering whether today is the right day to invest. Then stocks drop 10%, the headlines get ugly, and suddenly every decision feels urgent.

Should you sell? Stop contributing? Wait for things to settle down? Or invest more while prices are lower?

There isn’t one answer for everyone. But there is a good place to start:

A market decline is not, by itself, a reason to abandon a long-term investment plan.

Markets decline. They go through corrections, bear markets, recessions, and plenty of periods where nobody seems to know what’s going on. Sometimes the reason is obvious. Sometimes it isn’t. And sometimes the explanation that makes perfect sense today looks pretty silly a few months from now.

That’s part of investing.

The more important question is whether the decline has actually changed your financial situation.

If your goals, time horizon, cash needs, income, and ability to tolerate risk are still the same, a scary market doesn’t necessarily call for a different investment strategy.

What Should You Do When the Market Drops?

Start by looking at your own financial situation rather than trying to predict what the market will do next.

A market correction can feel very different when you’re looking at dollars instead of percentages. A 10% decline on a $1 million portfolio is $100,000. That’s a very different emotional experience from hearing that “the market is down 10%.”

But the decline itself doesn’t tell you what to do.

Instead, ask:

• When will you need the money?
• How much cash do you have outside your investments?
• How much risk is your portfolio taking?
• Have your financial goals changed?
• Are you still earning income?
• Are you already taking withdrawals?
• Has anything changed that would make your investment strategy inappropriate?

Those questions matter much more than trying to determine whether today’s decline will turn into tomorrow’s crash.

Market Volatility Is Part of Investing

It’s easy to think of a market decline as unusual when you’re watching your own account balance fall. Historically, though, significant declines within a year are normal.

Since 1980, the S&P 500 has experienced an average intra-year decline of about 14%, including years when it ultimately finished higher.

That doesn’t mean every decline will recover quickly. It means that owning stocks comes with the expectation that prices will sometimes fall substantially.

The reasons vary. Economic weakness, interest rates, inflation, changing expectations for corporate earnings, political uncertainty, and investor sentiment can all affect prices.

You don’t have to diagnose every move.

You do need to accept that some will be uncomfortable.

That’s the trade-off for owning assets that can grow over time.

A Correction Doesn’t Tell You What Comes Next

A market correction is commonly defined as a decline of about 10% from a recent high.

The difficult part isn’t recognizing that a correction happened. It’s knowing what happens next.

A 10% decline could stop there. It could turn into a much larger bear market. The market could recover quickly, or it could move sideways for months before eventually recovering.

Nobody knows.

That’s why questions like “How much further can it fall?” usually aren’t very useful. It can always fall further.

A better question is whether your financial plan can withstand the possibility that it will.

That’s where planning becomes more useful than prediction.

Why Investors Panic

Selling during a market decline can feel completely rational.

If your account is falling, getting out seems like a straightforward way to prevent further losses. The problem is that fear can change the decision you’re actually making.

Instead of asking, “What investments make sense for my long-term goals?” you’re asking, “How do I make this uncomfortable feeling stop?”

Those aren’t the same question.

Loss aversion makes this harder. We tend to feel losses more strongly than equivalent gains, so watching a portfolio decline can create a powerful urge to do something.

And doing something feels better than sitting there.

Sometimes, though, sitting there is exactly what the situation calls for.

Panic Selling Creates Another Decision

Suppose you sell because you think the market is going lower.

Maybe you’re right.

Now what?

You have to decide when to buy back in.

That’s where a decision that seemed simple can become much harder. The market doesn’t tell you when the decline is over, and some of the strongest gains can happen while investors are still worried.

You sell because you’re afraid of another decline.

The market rebounds.

You wait because you’re afraid the rebound won’t last.

It goes higher.

Eventually, you buy back in because you can’t stand being on the sidelines anymore.

At that point, you’re no longer following an investment plan. You’re reacting to the market.

That’s a difficult way to build long-term wealth.

Should You Invest When the Market Is Down?

For someone with a long-term time horizon and money they won’t need for years, a market decline can create an opportunity.

You’re buying investments at lower prices than you could have bought them previously.

But there’s an important catch:

A lower price today doesn’t guarantee a higher price tomorrow.

Stocks can keep falling after you invest. If you’ll need the money soon, that additional decline may be a risk you can’t afford.

Consider someone saving for a home they plan to buy next year, a large tuition payment coming up, or someone who has recently retired and needs the portfolio to fund current spending.

Putting that money into stocks simply because the market is down isn’t necessarily prudent.

Someone with decades before they need the money has a very different set of options.

Instead of asking, “Should I buy the dip?” start with a more useful question:

What is this money for, and when will I need it?

What About Investing During a Recession?

A recession can make investing especially uncomfortable.

People may be losing jobs. Businesses may be struggling. Economic reports may be getting worse. Headlines can make it sound like conditions will keep deteriorating for a long time.

But the economy and the stock market aren’t the same thing.

Economic data tells us what is happening. The stock market is constantly trying to price what investors think will happen next.

Those timelines don’t always line up.

During the Great Recession, for example, unemployment continued rising even after the stock market hit its low and began recovering. Some economic data looked worse after the market had already started looking ahead.

That’s one of the frustrating things about investing.

The moment the economy feels safest isn’t necessarily when investment prices are most attractive. And when prices look attractive, it often doesn’t feel safe.

Waiting for Things to Feel Better Can Backfire

Most investors would prefer to invest when everything looks good.

Inflation is under control. Unemployment is falling. Corporate earnings are strong. Interest rates look favorable. The economy is growing. The market has recovered.

Sounds great.

The problem is that by the time everything feels better, the market may have already moved.

Markets are forward-looking. Prices can change before the economic data does.

No magical point exists where uncertainty disappears, and investing becomes risk-free. Waiting for confirmation can simply become another attempt at market timing.

Market timing requires getting at least two major decisions right:

When to get out.

When to get back in.

Getting out isn’t enough.

If you sell before a downturn and sit in cash too long, you can miss the recovery. If you wait until the news looks better, prices may already be higher. And if you get back in too early, you may experience another decline and decide to sell again.

That’s a lot of decisions to get right.

A long-term approach is simpler. Decide what role each investment plays, how much risk you can tolerate, and when you’ll need the money. Then build the portfolio around those decisions, not whatever the market is doing this month.

It’s not exciting.

That’s part of the point.

Does It Ever Make Sense to Sell?

Absolutely.

“Stay invested” does not mean “never sell anything.”

Plenty of legitimate reasons exist to change a portfolio. You may be approaching retirement and need to reduce the amount of risk you’re taking. A company stock position may have grown into an uncomfortable percentage of your portfolio. Your goals may have changed. You may need the money. Or you may have realized your portfolio is taking more risk than you can tolerate.

Those are all good reasons to reconsider your investments.

The important distinction is why you’re selling.

If something meaningful has changed in your financial situation, a portfolio change may be appropriate.

If the only thing that changed is that your news feed suddenly looks terrifying, it’s worth thinking twice before hitting the sell button.

What If Your Portfolio Makes You Uncomfortable?

A downturn can also reveal something useful: your portfolio may have more risk than you can actually live with.

If a normal market decline makes you realize you can’t tolerate another 20% or 30% drop, pay attention to that.

Risk tolerance isn’t just an abstract questionnaire you fill out when you open an investment account. You learn a lot more about yourself when your portfolio is actually falling.

The answer isn’t necessarily to sell everything.

It may be to rethink the portfolio so you can actually stick with it.

A slightly less aggressive portfolio that you can live with is more useful than an aggressive portfolio you abandon when markets get difficult.

Your Portfolio Should Have a Job

One way to make market downturns easier to deal with is to stop thinking about your portfolio as one giant pile of money.

Different dollars can have different jobs.

Some money may be needed for expenses over the next year or two. Some may provide stability. Some can stay invested for long-term growth.

That distinction becomes particularly important as you approach retirement.

If every dollar is expected to grow as quickly as possible, a major downturn can create a lot of pressure. If you build the portfolio around your actual spending needs and time horizon, you have more flexibility.

That’s not about finding a portfolio that never goes down.

That portfolio doesn’t exist.

It’s about making sure you don’t have to make a terrible decision just because the market is having a terrible month.

What If You’re Near Retirement?

This is where I wouldn’t give everyone the same advice.

If you’re 35 and have decades before you need most of your retirement savings, a market decline is generally more about staying disciplined and continuing to invest appropriately.

If you’re 62 and planning to retire next year, the conversation is different.

And if you’re already retired and withdrawing from your portfolio, it’s different again.

The issue isn’t simply whether stocks are down. It’s whether you need to sell those stocks while they’re down to pay for your life.

That’s where sequence-of-returns risk matters.

Taking withdrawals after a major decline can reduce the amount of money left to participate in a future recovery. That doesn’t mean retirees should eliminate stocks. It means the portfolio needs to account for when withdrawals will occur.

Cash reserves, bonds, Social Security, pensions, portfolio withdrawals, taxes, and spending all need to work together.

The goal isn’t to eliminate volatility.

It’s to avoid being forced to sell a long-term investment because you need money for a short-term expense.

Build a Plan Before the Next Downturn

Every market downturn brings a new batch of predictions.

Someone thinks rates are going up. Someone else thinks they’re coming down.

One analyst expects a recession. Another says there’s nothing to worry about.

Maybe one of them will be right.

That’s not much of an investment strategy.

You can have an opinion about the economy or the market. You can even make tactical changes when there’s a good reason to do so.

But your long-term financial security shouldn’t depend on correctly predicting the next political event, recession, or market move.

A good investment plan doesn’t need to predict every crisis. It needs to give you something to fall back on when one happens.

That means knowing how much risk you’re actually willing and able to take. It means having enough liquidity that you aren’t forced to sell investments to cover an unexpected expense. It means using an asset allocation that fits your time horizon.

Most importantly, you should know in advance what would actually cause you to change the portfolio.

Maybe your goals change.

Maybe you retire.

Maybe your income or spending changes significantly.

One investment may become too large a percentage of the portfolio.

Those are decisions you can make with a clear head. Trying to make them while your portfolio is falling and every headline is telling you to be afraid is much harder.

So, Should You Invest During a Market Downturn?

Sometimes yes.

Sometimes no.

If you have a long time horizon, sufficient liquidity, and a portfolio that matches your financial situation, continuing to invest during a downturn can be perfectly reasonable.

If you need the money soon, don’t have enough cash reserves, or have discovered that you’re taking more risk than you can tolerate, the answer may be different.

What matters is that the decision comes from your financial circumstances rather than from whatever the market happened to do this week.

You don’t need to predict the bottom.

You don’t need to know when the next recession will start.

And you don’t need to wait until everything feels safe.

You need to know what your money is supposed to accomplish and have a plan for getting there.

The market is going to give you plenty of reasons to panic.

Don’t let it make your financial decisions for you.

Frequently Asked Questions

1. Should I invest when the stock market is down?

If you have a long-term time horizon and don’t need the money for near-term expenses, continuing to invest during a market decline can make sense. Your decision should also consider your cash reserves, risk tolerance, financial goals, and current portfolio.

2. Should I sell when the stock market drops?

Not simply because the market has fallen. Selling may make sense if your financial goals, time horizon, cash needs, risk tolerance, or portfolio allocation have changed. Selling solely because you’re afraid of further losses can create additional problems.

3. Is investing during a recession a good idea?

It can be, particularly for long-term investors who can tolerate additional market declines. A recession doesn’t automatically mean stocks have reached their lowest point, so the goal should be to follow an investment strategy rather than try to time the bottom.

4. Is it better to invest before or after a recession?

There is no reliable way to know exactly when a recession starts or ends. The stock market can decline before a recession is officially recognized and recover before economic data improves. Waiting for economic conditions to look completely healthy can mean missing part of the recovery.

5. What should I do when the stock market crashes?

Start with your own financial situation rather than the market forecast. Review your time horizon, cash reserves, asset allocation, and financial goals. If those things haven’t changed, avoid making a major portfolio decision solely because the market has declined.

6. How much can the stock market fall?

There is no fixed limit to how far stocks can decline. Corrections of around 10% are relatively common, while larger bear-market declines can occur during more severe periods. The more important question is whether your portfolio is designed to withstand those declines without derailing your financial goals.

7. Why is panic selling harmful?

Panic selling can turn a temporary decline into a permanent loss. It can also leave you trying to determine when to buy back in, potentially causing you to miss part of the recovery. One emotional decision can quickly become a series of attempts to time the market.

8. What is the difference between market volatility and investment risk?

Volatility describes how much an investment’s price moves. Risk is broader and includes the possibility of losing money or failing to achieve your financial goals. Volatility is an expected part of owning many investments with long-term growth potential, while the amount of risk you should take depends on your circumstances.

9. What should retirees do when the market falls?

Retirees should consider how much of their portfolio they need for current spending and how much can remain invested for long-term growth. Cash reserves, bonds, Social Security, pensions, withdrawals, and tax planning can all help reduce the need to sell long-term investments after a market decline.

10. Should I stop contributing to my investments during a downturn?

Not necessarily. If you’re investing for a long-term goal and your financial circumstances haven’t changed, continuing regular contributions can allow you to purchase investments at lower prices. However, if you need the money for a near-term expense or your financial situation has changed, reassessing your contributions may be appropriate.

---