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.
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.
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 |
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:
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.
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:
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.
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.
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.
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.
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.
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.
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.
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.
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