What Should I Do When the Stock Market Drops?

Overview:  

When the stock market drops, follow a few calm rules: don’t panic-sell, and trust your plan. If you’re still building your wealth, keep contributions going; lower prices can simply mean more shares. If you’re already retired, consider trimming or delaying non-essential withdrawals and one-time projects until markets stabilize. When it comes to taxes, losses in a down patch may help offset gains.  

Markets rise and fall. That’s not a reason to hold your breath; it’s a reminder to make a few smart adjustments and then keep going. The goal in a recession isn’t to outguess headlines. The goal is to make life feel manageable: bills get paid, your plan stays intact, and you can sleep at night. 

How do I prepare before a downturn? 

“An ounce of prevention is worth a pound of cure.” “A stitch in time saves nine.” There’s a reason why we have sayings that urge us to plan ahead. There are some things you can do in good times to prepare and improve your position when things take a turn for the worse.  

• Set aside liquid funds for near-term needs 
  The goal is to avoid having to sell investments when markets are down. If you’re retired, we suggest having 12 months of planned withdrawals in liquid funds. That way, when the market dips, you can keep paying the bills without touching long-term investments. Think of it as a pressure valve. When life happens, you have options.  

• Tidy up the moving parts you control. 
  If you have high-rate or variable-rate debt, look for ways to lessen its bite. Trim a few nonessential expenses so your monthly cash flow isn’t stretched thin. Small changes now make it much easier to stay steady later. 

• Decide your rules on a calm day. 
  Write down two or three simple guardrails such as: we won’t panic sell; we’ll let the plan (not the news) make the decision. When the market is down, you’ll already know what to do. 

• Stay invested. 
  History shows markets have recovered after past declines. Selling low turns a temporary drop into a permanent detour. Sticking with a diversified plan keeps you in position for the rebound. 

What should retirees living off investments do when the market is down?  

If you’re retired and drawing from investments for your daily spending, these ideas can help you keep your income smooth while the rest of your portfolio stays invested. 

• Trust the plan you built. 
  You already pressure tested your financial plan with “what ifs” from market dips, to inflation, and surprise expenses. A market downturn was part of the design from day one. Your 12-month spending reserve, your withdrawal rules, and your review schedule exist for exactly this moment. Take a breath and let the plan unfold. If something in life changes—not just the headlines—that’s the time to check in and adjust. 

• Press pause on extras—for now. Consider trimming or delaying non-essential withdrawals and one-time projects until markets stabilize. 

• And yes, stay invested. 
  The spending reserve exists so the rest of your portfolio can remain in place. Downturns are uncomfortable, but they’re part of a long journey you’ve prepared for. 

What should people still working do in a down market?  

Still earning and investing? Here’s how to turn a choppy market into long term momentum without overthinking it. 

• Keep the contributions going. 
  Consistency beats perfect timing. Automatic investing takes the emotion out of volatile periods. 

• Take advantage of the market’s lower prices. 
  When markets fall, you may be buying more shares for the same dollars—effectively a discount compared with prior stock prices. Over time, those extra shares matter. If it fits your budget, you could consider adding more to your investment accounts.  

• Harvest losses thoughtfully. Realized losses can offset realized gains and up to a small amount of ordinary income each year. The goal is risk control, not changing your long-term allocation.   

What’s the bottom line? Stay the course 

Protecting wealth in a downturn isn’t about finding the magic forecast. It’s about a few steady habits: keep some liquid funds for near term needs, clean up the parts of your budget you control, write down simple rules, and stay invested.  

Unsure what to change and what to leave alone? That’s a question people often have when they come to Sachetta for wealth management services. Let’s walk through it together, align cash flow and taxes, and keep your plan steady through the cycle. 

FAQs:

• How much cash should I keep for a downturn? 
  Enough liquid funds to cover near-term needs so you can avoid selling when the market is down; retirees often target 6-12 months of withdrawals. 

• Should I pause contributions in a down market? 
  Usually no—automatic investing buys more shares at lower prices and supports long-term growth. 

• What’s a “spending reserve” for retirees? 
  It’s cash set aside to fund withdrawals for the next 6–12 months so your income stays steady while invested assets have time to recover. 

• Is tax-loss harvesting right for me? 
  It can be. In a down market, realized losses may offset gains (and a small amount of ordinary income).  

• When should I change my plan? 
  When life changes—not headlines. Review if your goals, income, or time horizon shift. 

About the Author

Eric Sachetta, ChFC®, CFP®, is a Certified Financial Planner™ practitioner and focuses on financial planning and client relationship management. Eric believes that with proper Wealth Management, financial, and estate planning provides an opportunity to “look at all things that you value, see how they fit together, and make choices to balance everything and to maximize the things you want to do.”