Worried about a market crash? Here’s what you should do if you’re an investor

Market volatility can be nerve-wracking, especially if you’re investing for retirement or working toward long-term financial goals. Personal finance contributor Christopher Liew offers some tips to help you navigate a potential market crash with confidence, whether you’re an experienced investor or just getting started. (Getty Images / Caroline Purser)

If you’ve been keeping an eye on the stock market, you might be feeling uneasy. Maybe you remember the sharp downturn in 2020, or you’ve seen headlines warning of another potential crash. Market volatility can be nerve-wracking, especially if you’re investing for retirement or working toward long-term financial goals.

But here’s the good news: Market downturns are normal, and with the right strategy, you can protect your wealth and even come out ahead.

Whether you’re an experienced investor or just getting started, here are some smart financial moves to help you navigate a potential market crash with confidence.

Understanding market crashes

Market crashes are unpredictable and often driven by unforeseen events. For example, in 2020, the TSX Composite Index fell by 37 per cent in just a few weeks due to pandemic-related fears. However, by the end of the year, markets had mostly recovered.

Key notes about market crashes:

• They are unpredictable: Even experts can’t perfectly time the market.
• They are temporary: Historically, markets have recovered and continued growing over time.

Five steps to protect your wealth in a market downturn

1) Check or create your financial plan

If you already have a financial plan, now is the time to review it. If you don’t, it’s worth putting one together, especially if market volatility makes you uneasy. A strong plan gives you a clear roadmap and helps you avoid emotional, knee-jerk reactions when markets drop.

For those still saving and investing, downturns can be an opportunity to buy at lower prices. But if you’re nearing retirement or already withdrawing from your investments, stability is key. Having three to five years’ worth of expenses in cash or conservative assets can prevent you from selling investments at a loss when markets decline.

A good financial plan also includes a smart withdrawal strategy to make sure your money lasts. If you’re unsure where to start or whether your plan can handle a downturn, seeking professional advice can help you build a more secure financial future.

2) Assess your risk tolerance

If market declines cause significant stress or prompt you to reconsider your investments, it may be a sign that your portfolio is more aggressive than your actual risk tolerance allows. While a higher allocation to stocks can generate strong long-term returns, it also comes with increased volatility.

Take a moment to reflect on how you’ve reacted to past market downturns. Did you feel the urge to sell? Were you frequently checking your portfolio? If so, adjusting your asset mix to include a greater proportion of stable investments, such as bonds or cash equivalents, can help you maintain confidence in your strategy.

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A well-structured portfolio should align with both your financial goals and your emotional ability to endure market fluctuations. By making adjustments when markets are stable, you reduce the risk of making impulsive, reactionary decisions during periods of volatility.

3) Review your investment timeline

Your investment decisions should be guided by when you expect to need the funds. If your financial goals are decades away, short-term market movements should not dictate your strategy. Historically, markets have recovered from downturns, making it important to stay invested for the long term.

However, if you anticipate needing access to your funds within the next few years, such as for a home purchase, tuition payments, or retirement withdrawals, it is crucial to have an appropriate portion of your portfolio in lower-risk assets. Investments like high-interest savings accounts, guaranteed investment certificates (GICs), or short-term bonds can provide stability and liquidity.

The most damaging financial outcomes often come from being forced to sell investments at a loss due to poor planning.

4) Diversify your portfolio

Diversification is one of the best ways to manage risk in an uncertain market. A well-diversified portfolio contains a mix of different asset classes, such as stocks, bonds, real estate, and even alternative investments.

This reduces overall volatility as different assets react differently to market conditions. For example, while stock markets may decline, certain fixed-income investments like bonds tend to be more stable.

Also, consider diversifying geographically by investing in international markets, which can provide exposure to different economic cycles.

The goal is not to eliminate risk entirely but to spread it out in a way that minimizes the impact of any single market event. A diversified portfolio helps you weather market turbulence without making drastic changes based on short-term fear.

5) Stay calm & avoid panic selling

Market downturns are a natural part of investing. While it can be unsettling to see portfolio values decline, history has shown that markets tend to recover over time. The worst investment decisions often stem from emotional reactions, particularly the impulse to sell when markets are falling.

Attempting to time the market by selling during downturns and waiting for the “right time” to reinvest is rarely successful, and it is a big reason for underperformance by most investors. Many investors who exit the market during a crash struggle to re-enter at the right moment, often missing the strongest periods of recovery.

Instead of reacting to short-term volatility, focus on your long-term financial plan. If your investments are well-diversified and aligned with your goals, staying the course is often the best approach. Temporary declines do not equate to permanent losses unless you sell.

Final thoughts

Market downturns can be unsettling, but they are a normal part of investing. The key to protecting your wealth isn’t trying to predict the next crash, it’s having a solid plan in place. By assessing your risk tolerance, aligning your investments with your time horizon, and staying focused on the long term, you can navigate volatility with confidence.

Remember, history has shown that markets recover, and those who stay invested tend to come out ahead. If you’re unsure about your financial strategy, now is the perfect time to review or create a plan that keeps you on track, no matter what the market does.

Christopher Liew is a CFP®, CFA Charterholder and former financial advisor. He writes personal finance tips for thousands of daily Canadian readers at Blueprint Financial.