What to Do When the Market Crashes (and What Not to Do)
Markets drop. Sometimes sharply, sometimes for months. How you respond in those moments will define your long-term results far more than which ETFs you picked on a calm Tuesday. Here is a practical, Canadian-context guide to keeping your head when everyone else is losing theirs.
Why Market Crashes Feel Different This Time (They Always Do)
Every market crash feels uniquely catastrophic while it is happening. The 2008 financial crisis, the March 2020 COVID crash, the 2022 rate-hike drawdown — each one produced a steady stream of headlines explaining why this time the recovery would never come. It always did.
That does not mean losses are painless or that every stock recovers. Individual companies do go to zero. But diversified, broad-market portfolios — think XEQT, VEQT, or a couch-potato two-fund setup — have historically recovered and gone on to new highs. The chart looks terrifying in the valley; it looks unremarkable in hindsight.
Understanding this pattern does not make the emotional experience easier. But it does give you a framework for decision-making when your gut is screaming at you to act.
The Single Biggest Mistake: Selling Into the Drop
Selling during a crash feels like taking control. In reality, it converts a paper loss into a permanent one. Once you sell, you lock in the loss and face a second, equally difficult decision: when do you get back in? Most people wait until things feel safe again — which usually means waiting until the recovery is already well underway, and missing much of the rebound.
Research on investor behaviour consistently shows that the gap between fund returns and actual investor returns is largely explained by this pattern: buying high when sentiment is good, selling low when fear peaks. The stock market is one of the few places where people abandon a sale when prices drop.
Tax-sheltered accounts (TFSA, RRSP, RRIF) add another layer of cost to panic-selling. You cannot re-contribute RRSP room you have used. TFSA room does recover on January 1 of the following year, but you still crystallize the loss at the worst possible time.
| Investor situation | Recommended cash buffer |
|---|---|
| Standard recommendation (most investors) | 3-to-6-month emergency fund in a high-interest savings account or HISA ETF |
| Investors near retirement | 12-24 months of expenses in low-risk assets, to avoid forced selling |
| Stage | Stocks-to-bonds allocation |
|---|---|
| Before the crash (target allocation) | 70/30 |
| After a major crash (drifted allocation) | 60/40 — an invitation to rebalance, not to flee |
What You Should Actually Do During a Crash
The best action for most investors during a market crash is: nothing. Seriously. If your portfolio allocation by age was right before the crash, it is still roughly right during one. Sitting on your hands is harder than it sounds, but it is often the correct move.
If you want to do something productive, consider these steps:
- Check your asset allocation. A sharp equity drop will shift your portfolio away from its target. A 70/30 stocks-to-bonds portfolio might drift to 60/40 after a major crash. That is an invitation to rebalance — not to flee.
- Rebalance methodically. Portfolio rebalancing means selling what has held up (usually bonds or cash) and buying what has dropped (equities). It is the mechanical implementation of buy-low — done without emotion because you are following a predetermined rule.
- Keep contributing if you can. Dollar-cost averaging through a downturn means your regular contributions buy more units at lower prices. This is not a magic formula, but it does remove the temptation to time the market.
- Review your emergency fund. If a market crash is tempting you to sell investments, the real problem might be that you do not have enough cash outside the market. A 3-to-6-month emergency fund is the buffer that lets you leave your portfolio alone.
Rebalancing
- Rule-based: you have a target allocation and restore it when drift exceeds a threshold (commonly 5 percentage points)
- You are not predicting the bottom — you are correcting drift
- Selling what has held up (bonds or cash) and buying what has dropped (equities)
- More reliable than dip-buying for most investors
Buying the dip
- Discretionary: you try to time an entry, deploying extra cash because you believe prices are low
- Introduces judgment calls that most people execute poorly
- Common failure pattern: buying too early, then selling when it falls further
- Can work, but relies on timing skill most investors don't have
Rebalancing vs. Buying the Dip
These two concepts are often confused. Rebalancing is rule-based: you have a target allocation, and you restore it when drift exceeds a threshold (commonly 5 percentage points). You are not predicting the bottom — you are correcting drift.
Buying the dip is discretionary: you try to time an entry, deploying extra cash because you believe prices are low. It can work, but it introduces judgment calls that most people execute poorly (buying too early, then selling when it falls further). For most investors, systematic rebalancing is more reliable than dip-buying. See the dedicated comparison at rebalancing vs. buying the dip.
Special Situation: You Are Near Retirement
For investors within five to ten years of retirement — or already drawing down — a market crash carries a specific danger called sequence-of-returns risk. Even if your lifetime average return is identical to a younger investor's, the timing of bad years matters enormously when you are withdrawing.
Consider two investors who both average 6% annually over 20 years. The one who experiences bad returns in the first years of retirement, while withdrawing, can run out of money years before the one who gets bad returns later. This is not a theoretical problem — it is the central risk of retirement planning.
Strategies to manage sequence risk include:
- A cash buffer (bucket strategy): keep one to two years of living expenses in cash or a high-interest savings ETF, so you are never forced to sell equities at a loss to fund withdrawals.
- A glide path: gradually reduce equity exposure in the years approaching and entering retirement, rather than holding 100% equities until the day you retire.
- Flexible spending: if your plan allows it, reduce discretionary withdrawals during a crash and let the portfolio recover before drawing more.
If you are already using the four-percent rule or similar withdrawal strategies, a crash is the moment to revisit those assumptions with a financial advisor.
How to Think About Volatility Before the Next Crash
The best time to prepare for a crash is before it happens. Here is a simple checklist:
| Question | What it tells you |
|---|---|
| Do you know your current asset allocation? | If not, you cannot rebalance or assess drift |
| Do you have an emergency fund outside the market? | If not, a job loss during a crash forces you to sell |
| Would you panic-sell if your portfolio dropped 30%? | If yes, your equity allocation is too high for your psychology |
| Are you within 10 years of retirement? | If yes, sequence risk deserves explicit attention |
| Do you have a written investment policy statement? | A pre-committed plan reduces emotional decisions |
WealthWise lets you track how your actual portfolio is behaving — not just prices, but allocation drift, benchmark comparison, and concentration. Keeping an eye on those metrics on a regular (but not obsessive) schedule is far more useful than checking your portfolio daily during a crash. Check out our thoughts on how often you should check your portfolio.
The Bottom Line
Market crashes are not anomalies — they are a feature of investing in equities. The investors who build real wealth over decades are not the ones who predicted every downturn; they are the ones who stayed invested, rebalanced when their plan called for it, and kept contributing when the news was worst.
Your job during a crash is not to be clever. It is to not be your own worst enemy.
Frequently asked questions
Should I sell my ETFs when the market is crashing?
For most long-term investors, no. Selling locks in a paper loss and creates a second timing problem: knowing when to re-enter. The research is consistent — investors who stay the course outperform those who move to cash during downturns.
Is a market crash a good time to rebalance my portfolio?
Yes, if your asset allocation has drifted significantly. Rebalancing during a crash means systematically buying equities at lower prices using cash or bonds that have held their value — it is the mechanics of buy-low without requiring you to predict the bottom.
How much cash should I hold to feel safe during a market crash?
A 3-to-6-month emergency fund in a high-interest savings account or HISA ETF outside your investment portfolio is the standard recommendation. Investors near retirement often hold 12-24 months of expenses in low-risk assets to avoid forced selling.
What is sequence-of-returns risk and why does it matter in a crash?
Sequence-of-returns risk is the danger that bad investment returns early in retirement — when you are withdrawing — can permanently deplete your portfolio even if long-term average returns are fine. A crash in year one of retirement is much more damaging than the same crash in year 15.
How can I use WealthWise during a market crash?
WealthWise helps you see your actual allocation drift, benchmark your portfolio against the S&P 500, and track whether your diversification is working. It gives you data to make calm, rule-based decisions rather than reacting to headlines.
Start with WealthWise for free →Sources & references
Educational content. Figures and rules verified against the official sources above; tax amounts change annually.