Introduction
At some point in every investor’s journey, the market will fall sharply. Prices drop, headlines turn dramatic, and it suddenly feels as if the entire financial system is collapsing. It is natural to feel worried in moments like this, but how you respond matters far more than the crash itself.
This guide explains what to do when the market crashes, using real examples from the 2007–2009 financial crisis and the 2020 COVID-19 dip. You will see why panic selling is often the worst possible reaction, how markets have historically recovered, and how a disciplined investor can use downturns to build long-term wealth.
Staying invested through downturns has historically rewarded patient investors. Markets fall quickly and recover quietly, so missing the rebound can be more damaging than the crash itself.
What Is a Market Crash?
A market crash is a sudden and steep fall in share prices, often driven by fear, uncertainty or major economic shocks. It is usually defined as a drop of 20 percent or more from recent highs, but what truly defines a crash is the speed and intensity of the fall.
Crashes are uncomfortable, but they are also a normal part of market history. Over decades, markets have gone through wars, recessions, political crises and pandemics yet have still trended upwards overall. Understanding this context is the first step to staying calm.
Corrections vs Crashes
Smaller declines of 10–19 percent are often called “corrections”. They happen more frequently and are usually short lived. A crash tends to be deeper, faster and accompanied by extreme negative news coverage. Both feel unpleasant, but neither automatically means your long-term goals are in danger.
Lessons from the 2007–2009 Financial Crisis
The global financial crisis is one of the most dramatic modern examples of a market crash. Major indices such as the S&P 500 and FTSE 100 fell by more than 50 percent from their peaks. Banks failed, unemployment rose, and many investors feared that markets might not recover.
How the Market Fell
Between late 2007 and early 2009, the housing bubble burst, mortgage-backed securities collapsed, and confidence in the banking system vanished. Shares fell quickly as investors rushed to sell and protect what they could. Many sold near the bottom simply because the fear became overwhelming.
How the Market Recovered
Despite how hopeless things felt at the time, markets did not stay down. From March 2009 onwards, global stock markets began a powerful recovery that lasted for more than a decade. Investors who held on through the crisis, or continued investing monthly, saw their portfolios recover and then reach new highs.
Key Lesson from 2008
Investors who sold at the bottom locked in their losses. Those who stayed invested, or continued buying through regular contributions, benefited from one of the longest bull markets in history. The temporary crash became a powerful opportunity rather than a permanent loss.
What We Learned from the COVID-19 Dip
In early 2020, markets reacted violently to the outbreak of COVID-19. Travel stopped, businesses closed, and entire economies went into lockdown. Within weeks, global markets fell more than 30 percent. Once again, headlines were filled with phrases like “unprecedented”, “collapse” and “global depression”.
The Speed of the Drop
The COVID dip was one of the fastest bear markets in history. Prices fell at a pace that left many investors stunned. For anyone checking their portfolio daily, it felt as if years of gains had disappeared almost overnight, which triggered a wave of fear and urgent questions about whether to sell.
The Speed of the Recovery
What surprised many people was how quickly markets bounced back. As governments and central banks announced support packages, investor confidence slowly returned. Within months, many major indices had regained most of their losses. In some cases, markets were back at all-time highs before the global economy had fully reopened.
Key Lesson from COVID-19
The recovery began long before the news turned positive. Anyone who waited for the “all clear” from headlines missed part of the rebound. This shows why timing the market is almost impossible, and why staying invested can be more effective than trying to predict each turning point.
Why Panic Selling Is So Dangerous
When you see your portfolio falling, the instinct to “stop the bleeding” by selling everything can feel overwhelming. The problem is that this instinct often leads to selling after prices have already dropped heavily, and then sitting in cash while the market quietly recovers.
Locking in Losses
If you sell during a crash, you turn a temporary decline into a permanent loss. The market does not need your original buy price to care about your feelings. Once you have sold, your money is no longer invested, so it cannot participate when prices rise again.
Missing the Best Days
Historically, a small number of the best-performing days account for a huge portion of long-term returns. Unfortunately, those strong days often occur shortly after the worst ones. By trying to avoid the bad days, investors often miss the powerful rebounds that follow, which can severely reduce long-term growth.
Emotional Decision-Making
Panic selling is driven by emotion rather than a considered plan. In a crash, your brain focuses on short-term pain, not long-term opportunity. Acting on this fear may feel comforting in the moment, but it usually conflicts with your original goal of growing wealth over decades.
The Power of Staying Invested
Looking at history, markets have repeatedly recovered from crashes. This does not mean every company survives, but broad market indices have shown a strong tendency to move higher over the long term. Staying invested allows you to ride out the rough periods and benefit from the recoveries.
Time in the Market vs Timing the Market
It is tempting to believe you can sell before each crash and buy back at the bottom. In reality, even professionals struggle to do this consistently. A more realistic and historically successful approach is to stay invested in a diversified portfolio and give your money time to compound.
Using Regular Contributions
If you invest a fixed amount every month, a crash simply means you buy more shares at lower prices. This is sometimes called “pound cost averaging”. Instead of being a disaster, a downturn becomes a chance to acquire more ownership in good assets at a discount.
How to Respond When the Market Crashes
When you notice your portfolio falling sharply, use the following steps to respond calmly and intentionally, rather than reacting out of fear.
1. Pause and Breathe
Resist the urge to make instant changes. Take a step back, remind yourself of your time horizon, and give your emotions a chance to settle. Most financial mistakes are made in moments of panic, not after calm reflection.
2. Revisit Your Plan
Review why you are investing. If your goal is decades away, a short-term crash may not change your overall strategy at all. If your goals have genuinely changed, any adjustments should be made thoughtfully, not as a knee-jerk reaction to headlines.
3. Check Your Emergency Fund
Ensure you have an emergency cash buffer separate from your investments. This protects you from needing to sell shares at a bad time to cover unexpected expenses. An emergency fund is your first line of defence in any financial storm.
4. Rebalance Rather Than Run
If the crash has knocked your portfolio out of balance, consider rebalancing. This means trimming what has held up relatively well and adding to areas that have fallen more, bringing your mix of assets back in line with your target allocation.
5. Continue or Increase Regular Investing
If your financial situation allows, continuing your monthly investments through a crash can be extremely powerful. You are buying at discounted prices, which supports long-term returns when markets recover.
Buying the Dip: Opportunity with Caution
“Buying the dip” refers to investing more when markets have fallen. This can turn downturns into opportunities, but it should be done within a sensible framework rather than as a gamble on short-term movements.
When Buying the Dip Makes Sense
- You already have a solid emergency fund in cash.
- Your core portfolio is diversified across regions and sectors.
- You are using money you can leave invested for many years.
- You are adding to broad market funds or ETFs, not speculating on a single struggling company.
How to Avoid Overextending Yourself
It can be tempting to throw every spare pound into the market during a crash, but overcommitting can backfire if prices fall further. A more measured approach is to increase your regular monthly contributions or spread extra investments over several months, a strategy sometimes called “drip feeding”.
Building a Crash-Resilient Portfolio
The best time to prepare for a market crash is before it happens. While you cannot eliminate risk entirely, you can design your portfolio to be more comfortable to hold when volatility appears.
Diversify Across Assets
Combining different asset types can reduce the impact of a crash in any single area. For example, shares may fall sharply while high-quality bonds or cash remain more stable. A sensible mix aligned with your risk tolerance helps you stay invested when markets wobble.
Match Risk to Your Time Horizon
If you need the money within a few years, holding a large percentage in shares may feel very stressful during a crash. For longer-term goals, such as retirement in 20 or 30 years, a higher share allocation is usually more appropriate, because there is more time to recover from downturns.
Set Clear Rules for Yourself
Decide in advance how you will respond to big moves in the market. For example, you might commit to rebalancing once a year, continuing monthly contributions regardless of market conditions, and only reviewing your portfolio quarterly. Having rules makes it easier to stay calm when emotions run high.
Final Thoughts
Market crashes are unsettling, but they are not rare, and they are not new. The 2007–2009 crisis and the COVID-19 dip both felt terrifying in real time, yet long-term investors who stayed the course were rewarded as markets recovered and moved to new highs.
When the next crash comes, remember that your reaction is more important than the crash itself. Avoid panic selling, stick to your plan, and see downturns as part of the journey rather than the end of it. With a diversified portfolio, an emergency fund and a long-term mindset, you can navigate crashes with confidence and use them as stepping stones towards your financial goals.