What to Do When the Market Drops (Hint: Don't Panic)

How to Keep Your Cool and Make Smart Decisions During Market Volatility

You wake up, check your phone, and there it is: the market's down 500 points. Your stomach drops. You open your investment account and see red numbers everywhere. Your first thought? "Should I sell everything before it gets worse?"

Take a breath. Step away from the sell button. Let's talk about what's actually happening and what you should (and shouldn't) do about it.

Market drops are scary. I get it. Watching your account balance shrink feels terrible. But here's the truth: market downturns are normal, they're temporary, and if you react emotionally, you'll almost certainly make things worse.

So let's break down what to do when the market takes a dive, and more importantly, what not to do.

First, Understand That Market Drops Are Normal

The stock market goes up and down. That's what it does. It's not broken. It's not the end of the world. It's just how markets work.

On average, the market experiences a correction (a drop of 10% or more) about once a year. Bigger drops happen too. Bear markets (drops of 20% or more) occur every few years.

Since 1950, the U.S. stock market has experienced over a dozen bear markets. And you know what happened after every single one? The market recovered and went on to hit new highs.

I'm not saying this to minimize your stress. I'm saying it to give you perspective. What feels like a crisis right now is actually a regular part of investing.

The key is not to avoid downturns (you can't) but to have a plan for how you'll handle them when they happen.

Don't Do This: Sell Everything in a Panic

The worst thing you can do during a market downturn is panic sell. And I mean the absolute worst.

When you sell during a drop, you lock in your losses. Those red numbers on your screen? They're only losses if you sell. If you hold on, you give your investments a chance to recover.

Here's what usually happens: the market drops, people freak out and sell, the market keeps dropping (partly because everyone's selling), and then eventually it bottoms out and starts climbing back up. The people who sold? They're sitting in cash, watching the market recover without them.

Then what do they do? They wait until they "feel safe" to get back in. But by the time it feels safe, the market has already recovered a good chunk of its losses. So they sold low and bought high. That's the opposite of what you want to do.

Panic selling is how you turn a temporary setback into a permanent loss. Don't do it.

Consider This Instead: Check Your Time Horizon

The first question to ask yourself is: when do I need this money?

If you're 30 years old and investing for retirement, a market drop today doesn't matter. You've got 35 years for the market to recover. And it will recover. History is crystal clear on that.

If you're 65 and just retired, the picture is a bit different. You're going to need some of that money soon. But even in retirement, you're looking at a 20 or 30-year time horizon. You don't need all your money today. You need it spread out over decades.

This is why proper asset allocation matters. If you're retired or getting close, you shouldn't have 100% of your money in stocks anyway. You should have some in bonds or other more stable investments to cover your near-term expenses.

The money you don't need for 10 or 20 years? That can stay invested and ride out the storm.

Ignore the Noise

When the market drops, the financial news goes into overdrive. Every channel, every website, every headline is screaming about the crash, the crisis, the catastrophe.

Turn it off.

I'm serious. The financial media makes money by getting you to watch, click, and panic. Fear drives ratings. So they're incentivized to make everything sound as scary as possible.

You know what doesn't help you make good decisions? Spending all day watching your account balance drop while some talking head predicts the end of the world.

Check your investments occasionally. Stay informed. But don't obsess. Don't watch your portfolio every hour. And definitely don't make major financial decisions based on what some TV personality is yelling about.

The more you expose yourself to panic-inducing content, the more likely you are to make a panic-induced decision. Protect your peace of mind by limiting the noise.

Review Your Plan (And Stick to It)

This is why you have an investment plan in the first place. Not for when things are going great. For when things aren't.

If you built a solid plan based on your goals, your time horizon, and your risk tolerance, then a market drop shouldn't change anything. Your plan already accounted for this.

Go back and look at it. Remind yourself why you're invested the way you are. Remember what you're trying to accomplish. And unless something fundamental has changed in your life, stick to the plan.

Now, if you're looking at your portfolio during a downturn and thinking, "I can't handle this level of risk," that's valuable information. But don't make changes in the middle of a panic. Wait until the dust settles, then adjust your allocation to something you can actually live with.

The time to figure out your risk tolerance is not when the market is crashing. It's before. But if you didn't do that work ahead of time, at least wait until you're thinking clearly before you make big changes.

Consider It a Sale (If You Have the Cash)

Here's a different way to look at market downturns: everything just went on sale.

When stocks drop 20%, you can buy the same investments for 20% less than you could last month. If you're still in the accumulation phase and you have cash available, a downturn is actually an opportunity.

This doesn't mean you should dump your entire emergency fund into the market. And it doesn't mean you should try to time the bottom (you won't). But if you've got money to invest and you were planning to invest it anyway, a market drop is a good time to do it.

Keep making your regular contributions to your 401(k) or IRA. Keep dollar-cost averaging. You're buying shares at lower prices, which means you'll own more shares when the market recovers.

Some of the best long-term returns come from investments made during scary times. But you have to have the stomach to buy when everyone else is selling.

Rebalance If It Makes Sense

When the market drops, your asset allocation gets thrown off. If you had a 60/40 mix of stocks and bonds, and stocks drop 20%, you might now have something closer to 50/50.

Rebalancing means selling some of what went up (bonds, in this case) and buying more of what went down (stocks). This forces you to buy low and sell high, which is exactly what you want to do.

Now, you don't have to rebalance in the middle of every market hiccup. But if your allocation is significantly out of whack, it might be worth considering.

The key is to do this systematically, not emotionally. You're rebalancing back to your target allocation, not making a bet on where the market's going next.

Remember: You Only Lose Money If You Sell

This is worth repeating because people forget it when they're panicking.

When your account shows a loss, that's what's called an unrealized loss. It's not real until you sell. As long as you stay invested, your money has the potential to recover.

Think of it like owning a house. If the housing market tanks and your home value drops 20%, did you lose 20% of your money? Not unless you sell the house at that moment. If you stay put and wait for the market to recover, your home value comes back.

Investments work the same way. The value fluctuates, but you only lock in a loss by selling.

I know it's hard to watch your balance shrink. But if you can resist the urge to do something, anything, just to feel like you're taking action, you'll be in much better shape when things turn around.

What If This Time Is Different?

Every time the market drops, people say, "But what if this time is different? What if the market doesn't recover?"

Here's the thing: every downturn feels different when you're living through it. The 2008 financial crisis felt apocalyptic. The COVID crash in 2020 was terrifying. The dot-com bubble, the Great Depression, every bear market in history felt like the end of the world to the people experiencing it.

And yet, every single time, the market recovered. Companies adapted. The economy adjusted. Investors who stayed the course came out ahead.

Could this time actually be different? Sure, anything's possible. But betting that the entire global economy will permanently collapse is a pretty extreme position to take with your retirement savings.

If the market never recovers, we've got bigger problems than your 401(k) balance. But history suggests that's not how it works. Economies grow. Companies innovate. Markets recover. That's been true for over a century, and it's likely to remain true.

When to Actually Be Concerned

Okay, so when should you worry? When does a market drop actually require action?

Here are the situations where you might need to make changes:

You Need the Money Soon

If you're going to need a chunk of your investments in the next year or two, that's a problem. Money you need in the short term shouldn't be fully invested in stocks in the first place.

This is why planning ahead matters. You should have moved that money to safer investments before the downturn hit. But if you didn't, you might need to reconsider your options.

Your Portfolio Is Too Aggressive for Your Situation

If the market drops 20% and you're losing sleep, you might be invested too aggressively. That's okay. It happens. But don't make changes in the middle of a panic.

Wait for things to stabilize, then adjust your allocation to something that matches your actual risk tolerance. Better to accept slightly lower long-term returns than to panic sell during every downturn.

Your Personal Situation Has Changed

If you lost your job, had a health crisis, or something else major happened in your life, that might require adjustments to your financial plan. A market drop doesn't change your plan, but a life event might.

In that case, you're not reacting to the market. You're reacting to your circumstances. That's different.

Talk to Someone Before You Make Big Moves

Look, market downturns are stressful. If you're feeling anxious, uncertain, or tempted to make big changes, talk to someone first.

At Iron Eagle Advisors, we've been through plenty of market cycles with our clients here in Charlottesville. We know how scary downturns feel, and we help people make rational decisions when emotions are running high.

Sometimes the right answer is to do nothing. Sometimes it's to rebalance. Sometimes it's to adjust your plan because your situation has changed. But whatever you do, it should be based on a clear-headed assessment of your goals and circumstances, not on fear.

We're here to help you think through your options, review your plan, and make decisions that serve your long-term interests. Not the panicked decisions that feel right in the moment but hurt you in the long run.

Market drops are part of investing. They're not fun, but they're not the end of the world either. With the right plan and the right perspective, you'll get through this just like every other investor has gotten through every other downturn in history.

Worried About Your Investments During a Market Downturn?

Let's review your portfolio and make sure your plan still makes sense. Schedule a free consultation with Iron Eagle Advisors today.

Asset allocation does not ensure a profit or protect against a loss.

Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.