How to Invest During a Market Downturn
You're either watching your portfolio drop right now and trying to figure out what to do, or you're at all-time highs and quietly bracing for the next correction because you know how this goes. Whichever one brought you here, the feeling is the same. You're standing at the window of your portfolio wondering whether you should be doing something, and the noise around you is making it harder to think clearly.
Here's the honest version of "how to invest during a market downturn." It's mostly a piece about how to keep your brain from running the show. That's the part most articles skip, and it's the part that determines whether a 30 percent drawdown becomes a temporary setback or a permanent loss of wealth.
TL;DR
The S&P 500 has had 27 bear markets since 1928. Every single one ended in a recovery to new highs.
About 42 percent of the market's strongest days over the past 20 years happened during bear markets, and 78 percent of the best days clustered inside or just after them.
An investor who stayed fully invested from 2004 to 2024 earned 10.5 percent annualized. Missing just the 10 best days dropped that to 6.2 percent.
The biggest risk in a downturn is behavioral: the selling, the pausing, and the flight to cash that a scary headline triggers.
The right plan in advance, executed without modification, beats the smartest reaction made in fear.
Your Brain Is Lying to You
Two cognitive errors dominate investor behavior during downturns.
The first is loss aversion. Decades of research starting with Kahneman and Tversky has shown that the psychological pain of losing $1,000 is roughly twice as intense as the pleasure of gaining $1,000. [1] That sounds harmless until you realize what it does in real time: a 20 percent decline in your portfolio feels like a 40 percent threat to your financial future, even though the math is identical to the 20 percent gain you celebrated nine months earlier.
The second is recency bias. When markets drop, your brain extrapolates the recent trend forward. If the S&P 500 fell 12 percent last month, your brain reads "12 percent per month, indefinitely" and quietly forecasts a catastrophic outcome that the historical data does not support. The same brain, when markets rise 12 percent in a month, extrapolates that forward and concludes you should buy more.
These two errors don't fight each other. They compound. You feel the pain of losses twice as intensely as gains, and your brain insists the losses will continue. The combination is what produces the most expensive investor behavior in finance: selling at the bottom and re-entering after the recovery is well underway.
Knowing this doesn't make you immune to it. Knowing it gives you the option to push back when it starts happening.
Historical Downturns and Recoveries (Every Single One)
Some context for the next time your brain insists this time is different.
Since 1928, the S&P 500 has had 27 bear markets, defined as declines of 20 percent or more from a recent peak. [2] In the same span, it has had 28 bull markets. The average bear market has lasted 289 days, or about 9.6 months, and produced an average decline of roughly 35 percent. The average bull market has lasted 988 days and produced gains many times larger than the bear market that preceded it. [3]
Recent examples for calibration:
The 2008 financial crisis. The S&P 500 dropped 57 percent peak to trough between October 2007 and March 2009. The full recovery to the previous high took until May 2013, about four years.
The 2020 COVID crash. Down 34 percent in 33 days. Back to new highs by August 2020, about four months. The fastest recovery of any major crash in 150 years.
The 2022 bear. Down about 25 percent through October 2022. Full recovery took roughly 18 months. [4]
Every single one of these declines was, in the moment, accompanied by analysts, columnists, and financial media insisting that this time was different. Every single one ended in a recovery to new highs. A 50-year investor should expect to live through roughly 14 bear markets over their working life. [5] Each one will feel uniquely threatening. Each one will, on the historical record, end the same way.
What Not to Do (This Is the Important Part)
Most "what to do in a downturn" advice is actually warning you off the things people most commonly do.
Don't move to cash. The strongest argument against market timing comes from J.P. Morgan's analysis of the S&P 500 from 2004 to 2024. An investor who stayed fully invested earned 10.5 percent annualized. An investor who missed just the 10 best days earned 6.2 percent. Missing the 20 best days dropped returns to 3.6 percent. Missing 30 dropped them to 1.4 percent. [6]
The reason this matters so much: seven of the 10 best days over that period occurred within 15 days of one of the 10 worst days. Forty-two percent of the market's strongest days happened during bear markets. Another 36 percent occurred in the first two months of a new bull market, before it was visibly a new bull market. [7] If you sell during the decline, you are almost guaranteed to miss the recovery, because the recovery starts when sentiment is at its worst.
Don't stop contributing to your 401(k) or IRA. This is one of the most common reactions to a downturn, and it's exactly backwards. When the market is down 30 percent, every contribution you make is buying shares at a 30 percent discount. The investors who came out of the 2008 crisis with the most wealth a decade later are the ones who kept buying through the bottom.
Don't reposition into "safer" investments at the worst time. Moving from stocks to bonds during a 30 percent equity drawdown locks in the loss and frequently sells right before the recovery. If your asset allocation was right for your time horizon in January, it's still right in March.
Don't take financial advice from the news cycle. Financial media has to fill 24 hours every day. The honest answer most of the time is "the market dropped, here's why we think, but who knows, ride it out." That answer doesn't fill 24 hours, so the coverage tilts toward urgency, drama, and prediction. You don't need it.
The Opportunity Most People Miss
Downturns are the highest-value moments in a long-term investor's career, and most people are too anxious to see it.
Tax-loss harvesting. If you hold investments in a taxable brokerage account, a downturn lets you sell losing positions to bank capital losses, then buy similar (not substantially identical) investments to maintain your exposure. Those losses can offset future capital gains and up to $3,000 of ordinary income per year, indefinitely. Done thoughtfully across a long career, tax-loss harvesting can add meaningful return without changing your portfolio.
Roth conversions. If you hold traditional IRA assets, a downturn lets you convert more shares to a Roth IRA for the same tax bill. You pay ordinary income tax on the converted amount today, then those assets grow tax-free for the rest of your life. Converting during a drawdown means you pay tax on a smaller dollar amount and recover the growth in the Roth.
Increased contribution rates. If you can afford it, raise your 401(k) contribution rate during the downturn. You're buying shares cheaper. The math compounds.
Rebalancing into your target allocation. If your plan was 80 percent stocks and 20 percent bonds, and stocks dropped 30 percent, you're now closer to 70/30 by value. Rebalancing back to 80/20 means buying stocks at lower prices and trimming bonds at full price. The discipline of rebalancing in a downturn is one of the cleanest sources of long-term return enhancement available to a self-directed investor.
None of these moves require predicting the bottom. They just require recognizing that a downturn creates conditions that favor specific actions, and that those actions are the opposite of what panic suggests.
What to Actually Do When Markets Drop
The honest playbook is shorter than the panic-content makes it.
Step 1: Don't check your account every day. The cost of looking is high. The benefit is near zero. Set a calendar reminder for the next quarterly check and put the phone down.
Step 2: Keep contributing on schedule. Whatever auto-contribution you set up in calmer times keeps running. This is the entire purpose of dollar cost averaging: you remove the timing decision from your hands. Trust the prior version of yourself who set it up.
Step 3: Rebalance once. If your stock-to-bond allocation has drifted meaningfully from your target, do one rebalance during the drawdown. Don't try to time the rebalance perfectly. Just bring the portfolio back to your written plan.
Step 4: Look for harvest and conversion opportunities in taxable and traditional accounts. Tax-loss harvest in the brokerage, evaluate Roth conversions if you have traditional IRA assets and tax-bracket capacity.
Step 5: Reread your investment plan. The plan you wrote when nothing was happening is more reliable than the plan you'd write right now. Trust it.
Step 6: Wait. The hardest step, and the one with the largest dollar value attached. Time is doing your work for you.
If you take nothing else from this post, take this: the next bear market will feel uniquely terrifying, will produce headlines insisting the recovery is delayed or different, and will end like the previous 26 ended. Plan now, while you can think clearly. Then trust the plan when you can't.
The Part That Actually Matters
The reason any of this matters isn't whether you beat the S&P 500 by 0.7 percentage points over the next 25 years. It's whether you arrive at the year you'd like to stop working with a portfolio big enough to actually let you stop. The bear market that triggers your worst behavior is the one that breaks that arrival. The bear market you ride out, that you keep contributing through, that you don't let your brain talk you into selling, is the one that makes the math work.
Every recovery in the historical record happened on a schedule nobody could see in advance. Every recovery rewarded the people who were still in the market when it started. The plan that gets you to the trip, the year off, the option to slow down at work, the version of you who has actual choices in 30 years, is the plan you'd write right now, in this room, when you can think. Then you trust it when you can't.
FAQs
Should I sell stocks during a bear market?
For long-term investors with at least 10 years until they need the money, the historical answer is no. The S&P 500 has recovered from every bear market in its history, and the strongest market days cluster within and immediately after the worst declines. Selling locks in losses and frequently means missing the recovery.
Is it safe to invest during a recession?
Some of the best long-term entry points in market history were during recessions. Investors who bought through March 2009, March 2020, and October 2022 captured significant returns over the following years. The honest framing is that no one can identify the bottom in real time, but consistent investing through downturns has historically rewarded investors with long time horizons.
What's a recession-proof portfolio?
There isn't really one, in the strict sense. Every asset class has had drawdowns. The closest practical answer is a diversified portfolio that includes U.S. stocks, international stocks, and bonds, with the allocation matched to your time horizon. A 30-year-old who can ride out a 40 percent equity drawdown should hold a heavy stock allocation. A 70-year-old who needs portfolio income should hold more bonds and cash. The diversification protects you. The match to time horizon protects you from yourself.
Should I keep contributing to my 401(k) when the market is dropping?
Yes. Every contribution during a downturn buys shares at lower prices. The investors who came out of the 2008 and 2020 crashes with the most wealth a decade later are the ones who kept buying through the decline. If anything, increase the contribution if you can afford it.
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References
[1] Kahneman, D., & Tversky, A. "Prospect Theory: An Analysis of Decision under Risk." Econometrica, 1979. https://www.jstor.org/stable/1914185
[2] Hartford Funds (via Ned Davis Research). "10 Things You Should Know About Bear Markets." https://www.hartfordfunds.com/practice-management/client-conversations/managing-volatility/bear-markets.html
[3] Keen Wealth Advisors. "Bear Markets and Bull Markets: What Does the Data Show About Frequency and Duration?" https://keenwealthadvisors.com/insights/bear-markets-and-bull-markets-what-does-the-data-show-about-frequency-and-duration
[4] Morningstar. "Stock Market Crashes: A Look at 150 Years of Bear Markets." https://www.morningstar.com/economy/what-weve-learned-150-years-stock-market-crashes
[5] National Bureau of Economic Research. "US Business Cycle Expansions and Contractions." https://www.nber.org/research/data/us-business-cycle-expansions-and-contractions
[6] J.P. Morgan Asset Management. "Back to School: 3 Principles for Your Portfolio." Analysis using S&P 500 Total Return Index, July 2004 through July 2024. https://www.jpmorgan.com/insights/markets/top-market-takeaways/tmt-back-to-school-3-principles-for-your-portfolio
[7] J.P. Morgan Private Bank. "The Power of Intent." https://privatebank.jpmorgan.com/nam/en/insights/wealth-planning/the-power-of-intent
[8] Visual Capitalist. "Timing the Market: Why It's So Hard, in One Chart." https://www.visualcapitalist.com/chart-timing-the-market/
[9] FMP Wealth Advisers. "The Cost of Missing the 10 Best Days in the Stock Market." https://fmpwa.com/the-cost-of-missing-the-10-best-days-in-the-stock-market/
[10] Covenant Wealth Advisors. "Understanding Stock Market Corrections and Crashes (2026)." https://www.covenantwealthadvisors.com/post/understanding-stock-market-corrections-and-crashes
[11] Yardeni Research. "Stock Market Historical Tables: Bull & Bear Markets." https://old.yardeni.com/wp-content/uploads/BullBearTables.pdf
[12] Crestwood Advisors. "May 2026 Economic and Market Update: New Highs and Old Risks." https://www.crestwoodadvisors.com/may-2026-economic-and-market-update/
[13] Vanguard. "Advisor's Alpha: Putting a Value on Your Value." https://corporate.vanguard.com/content/dam/corp/research/pdf/Putting_a_value_on_your_value_Quantifying_Vanguards_advisor_alpha.pdf
[14] IRS. "Topic No. 409, Capital Gains and Losses." https://www.irs.gov/taxtopics/tc409
[15] IRS. "Rollovers of Retirement Plan and IRA Distributions." https://www.irs.gov/retirement-plans/plan-participant-employee/rollovers-of-retirement-plan-and-ira-distributions
[16] Morningstar. "Mind the Gap: A Report on Investor Returns." https://www.morningstar.com/lp/mind-the-gap
[17] Bespoke Investment Group. "S&P 500 Bull and Bear Market Length Analysis (94 years)." Cited via Nasdaq. https://www.nasdaq.com/articles/will-sp-500-fall-below-5000-2026-historically-flawless-predictive-metric-weighs
About The Author
Shaun Melby, CFP® provides fee-only financial planning and investment management services in Nashville, TN through his company Melby Wealth Management. Shaun has over 15 years of experience as a financial advisor in Nashville. Shaun created Melby Money to educate the public about finances.
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