Market Crash Investing: What to Do (and Avoid) During a Bear Market

Why Your Brain Wants to Flee — and Why That Instinct Backfires

Behavioural psychology has a name for what you feel when your portfolio drops: loss aversion. Pioneering research by economists Daniel Kahneman and Amos Tversky showed that the pain of a financial loss is roughly twice as intense as the pleasure of an equivalent gain. In other words, losing $5,000 feels psychologically about twice as bad as gaining $5,000 feels good.

This bias is wired into our brains — fleeing immediate danger was a survival strategy for millennia. But financial markets don't work like physical threats. Panic-selling doesn't save you: it locks in the loss. As long as you haven't sold, the drop remains theoretical (an "unrealized loss" or "paper loss"). The moment you sell, the loss becomes real and permanent — and you forfeit the eventual recovery.

Crashes Are Normal: A Look at the Historical Record

Since 1929, North American stock markets have lived through numerous major bear markets (classically defined as a drop of at least 20% from peak). A few notable examples:

• Black Monday (1987): −22% in a single day. Full recovery in under two years.
• Dot-com bust (2000–2002): −49% for the S&P 500. Full recovery over five to six years.
• Global financial crisis (2008–2009): −57%. Full recovery by around 2013.
• COVID-19 crash (March 2020): −34% in 33 days. Full recovery in under six months.

It is important to stress that past performance does not guarantee future results. Nothing ensures a recovery will occur within any given timeframe, or even at all for a specific security. That said, large, diversified economies have historically always eventually recovered from their crises. This is the central argument for patience — not a guarantee, but a compelling historical record.

Staying Invested and Continuing Contributions: Buying at a Discount

During a bear market, every automatic contribution to your RRSP, TFSA, or workplace pension plan buys units at a reduced price. This is the principle of dollar-cost averaging: by investing a fixed amount at regular intervals (rather than trying to "time the market"), you automatically buy more units when prices are low and fewer when they are high.

Trying to time the S&P 500 historical return cycle is notoriously difficult, even for professionals. Vanguard's research has repeatedly shown that investors who attempt to enter and exit the market at precisely the right moments underperform, on average, those who stay invested over the long run. Missing just the ten best trading days over twenty years can dramatically reduce your total return — and those days frequently occur in the weeks immediately following the worst crashes.

The Emergency Fund: Your First Line of Defence

The primary reason people are forced to sell during a crash is that they need the money to live. That's where a solid emergency fund — typically three to six months of essential expenses held in a high-interest savings account or short-term GIC — makes all the difference.

• It prevents you from liquidating investments at a loss to cover unexpected expenses.
• It gives you the psychological peace of mind to avoid panic-selling.
• It is kept separate from your long-term investments — it is not a source of extra money to invest in stocks.

Canada's financial regulators and consumer agencies broadly recommend building this financial cushion before investing aggressively in equities. It is a foundation, not a luxury.

If You're Near Retirement: Sequence-of-Returns Risk

The advice above applies well to long-horizon investors who have decades ahead of them. If you are within five to ten years of retirement (or already retired), your situation is meaningfully different and deserves specific attention: this is known as sequence-of-returns risk.

If a major crash occurs just before or at the start of your retirement and you must draw down your portfolio to cover living expenses, you are selling units at a low point — without enough time to recover. This is why financial advisors commonly recommend gradually shifting toward bonds, GICs, and cash as you approach retirement. These lower-volatility assets can serve as a "drawdown reservoir" while equities recover. A well-structured decumulation plan, ideally reviewed with a registered financial advisor, is essential at this stage.

Finally, whatever stage of life you're in: avoid checking your portfolio every day during a bear market. Research consistently shows that frequent monitoring increases anxiety and the temptation to react impulsively. Trust your strategy, not your emotions in the moment.

Frequently asked questions