What to Do When the Market Crashes: Must Know for Beginners

Key takeaways

Avoid panic-selling your holdings during market crashes out of fear, and stay calm.
Review your portfolio, the logic behind your investment, and financial goals before making any change.
Consider additional investments only after evaluating valuations, fundamentals, risk, and available capital.

What would you do during a market downturn when your portfolio suddenly falls 10%, 15%, or even 20% in a matter of days? There’s no denying that even experienced investors question their decisions when the market sees a sharp decline. For beginners, a red portfolio can create a stronger urge to sell their holdings or stop investing altogether.

A market crash doesn’t affect every investment in the same way. There’s no single response that every investor finds suitable for them during these periods. First, you need to understand the cause behind the decline. Accordingly, you can assess how it affects your portfolio and financial goals based on your risk tolerance.

This guide comprehensively explains what to do when the market crashes, so that you can avoid impulsive decisions and manage your portfolio strategically.

What is a Market Crash?

A market crash is a sharp or rapid decline in the prices of stocks or other market-linked instruments. It is more extensive and prolonged compared to daily market fluctuations. A market crash can involve widespread selling across the market over a relatively short period.

Several factors may trigger this sharp decline. It may be caused by financial instability, a major economic slowdown, or geopolitical events. At times, corporate challenges, unexpected changes in policy or a sudden shift in investor sentiment can cause the market to crash.

As an investor, you must be able to differentiate a market crash from other types of declines.

A market correction is generally a smaller decline from a recent high.
A bear market involves a more prolonged period of weakness.
A market crash usually involves a much sharper fall over a shorter period.

Each type of decline has an underlying cause, which investors must understand. A broad market fall triggered by temporary uncertainty can have different implications compared to a decline caused by worsening economic conditions.

The percentage of fall alone doesn’t tell you what to do next. It’s important to figure out why the decline is taking place, which provides a more useful context.

What to do when the Market Crashes?

Often, a sharp fall leads to panic among investors. They feel the urge to act quickly. Here’s what to do when market crashes before making any major changes to your portfolio.

Stay calm and avoid impulsive decisions

Watching your investments lose their value can be painful. However, remember that you still have an unrealised loss. If you sell off your holdings under pressure, you’ll actually realise that loss.

This doesn’t mean investors should never sell during a downturn. Instead, make your decision based on the current viability of the investment, and not the fear caused by short-term price movements.

Take some time to evaluate the market conditions. This can help you separate an emotional reaction from a reasoned investment decision.

Check why the market is falling

Next, try to identify the reason behind the decline. Is a broad economic concern dragging the entire market down? Or is a particular sector under pressure? Or maybe your holdings are being affected by a company-specific development.

These are vital questions to consider, as the impact on an investment can vary significantly. A market-wide decline may not necessarily change the long-term outlook for every company. But a company-specific problem requires you to review an individual stock.

Review your portfolio

A market crash brings you an opportunity to review your existing holdings. Revisit why you bought each stock or fund in the first place. Consider these questions during the evaluation:

Has the business changed?
Are the original growth expectations still reasonable?
Has the fund strategy changed?
Does the market pose new risks that were not present earlier?

If you find that the original investment logic remains intact, a temporary decline in price may have a different significance compared to a fall caused by deteriorating fundamentals.

Assess your available cash

For investors, falling prices can be an opportunity to buy more if they have disposable funds. However, do not use money kept aside for emergencies, essential expenses or near-term financial commitments for investment simply because the market has declined.

Review your investment horizon

Your investment horizon is a crucial aspect to consider, as the same market decline may have very different implications depending on when you need the money. Suppose you’re saving for your retirement fund, and the goal is several decades away. In this scenario, you have more time to handle volatility in the market. However, if you need the money soon, the reaction can be different. Review your investment horizon to determine whether the current market decline changes the original plan.

Should you sell your investments during a Market Crash?

The choice to sell your holdings during a market crash is not right or wrong by default. Investors should analyse whether the reason for holding it is still valid. During sharp price drops, investors often sell their holdings out of panic.

However, if you sell your investment after a significant decline, the loss is locked in. Even if the stock price retraces back in the future, you can’t benefit from the recovery.

At the same time, you cannot hold an investment indefinitely simply because selling it would lead to a loss. Investors may consider selling if a valid reason supports that decision. For instance:

The fundamentals of the company may have deteriorated
The original investment logic doesn’t apply anymore
Your financial circumstances may have changed
A particular holding creates excessive concentration in your portfolio

Do not consider the original purchase price as the only reference point. Consider whether you should still own the investment today based on its current price, prospects, and risk. This way, you can shift the priority from trying to recover a previous loss to evaluating whether the investment still makes sense.

Should you invest during a market crash?

A market crash often brings down the prices of many investments. This creates potential opportunities for long-term investors. But a lower price doesn’t automatically make the stock an attractive investment. The prices of some stocks may fall due to temporary market sentiment. Others may decline due to deteriorating fundamentals or competitive position. Buying the latter simply because the stock is cheaper exposes your portfolio to risk.

If you’re considering buying further during a market crash, evaluate the fundamentals. Take time to assess the valuation and long-term outlook before you commit more capital.

During a crash, many investors try to identify the exact bottom of the market. However, markets may continue to fall even after you make a purchase. If you deploy all the available capital at once, it leaves little flexibility if the prices decline further.

A practical strategy is to invest with a staggered approach, where you spread your purchase across different market levels. This puts you in a position to handle further volatility instead of trying to predict the lowest point.

How to manage your portfolio during a Market Crash?

A market crash can reveal whether the existing position of the company still aligns with your intended risk level. Re-evaluate your asset allocation, review concentration and maintain adequate diversification as you manage your portfolio.

Reassess and rebalance asset allocation

Your asset allocation determines how much of your portfolio is invested across different asset classes. A major market movement can change the actual allocation of your portfolio from your original plan. For instance, a market crash may reduce the equity allocation in your portfolio compared to other assets, which may need to be balanced.

Review concentration

Check whether too much of your portfolio is concentrated in a single category. If your portfolio was already concentrated, the market decline may make it more vulnerable when a particular sector comes under pressure. Review your position sizes to understand how individual investments influence your overall portfolio.

Maintain diversification

To maintain a well-balanced portfolio, investors need to diversify their holdings across different securities, sectors or asset classes. While diversification cannot eliminate market losses, it can reduce the dependence on the performance of a single investment. Review whether your portfolio remains properly diversified during periods of high volatility.

What to do with your stocks and mutual funds?

The approach to a market decline can differ, depending on whether you’re holding individual stocks or mutual fund units. Here’s what to do when market crashes based on your approach to investing.

Factor	Direct stocks	Mutual funds
Exposure	Individual companies	Portfolio of securities
Review your focus on	Company fundamentals	Fund strategy and portfolio
Diversification	Depends on investor	Built into the fund, subject to mandate
During a decline	Review the logic behind investing in each company	Review the strategy, holdings and long-term suitability of the fund
Additional investment	Each stock needs to be individually assessed	Can be considered through a systematic approach

If you’re investing directly in stocks, you need to examine the financial performance, valuation, competitive position and future prospects of each company, as different companies are affected to a different extent by a market crash. That’s why it’s not appropriate to assume that every stock will recover at the same time.

For mutual funds, you can review the portfolio composition of the fund, its investment approach, and its long-term viability. A decline in NAV does not by itself mean that the fund is no longer suitable.

Conclusion

A market crash can be unsettling for investors. But there’s no point in making an immediate or drastic change to your portfolio. In the first place, try to analyse the reason behind the decline. Review your individual investments and check the concentration of your portfolio.

Also, consider your financial goals, which can put you in a better position to respond to the crash. If an investment no longer makes sense considering your initial investment logic or financial situation, you may consider selling it.

If stock valuations and fundamentals give you valid reasons, you may even buy additional shares to average the cost price. Always consider your long-term financial goals with reference to current circumstances to make investment decisions.

FAQs

What should I do first when the stock market crashes?

Do not panic when the stock market crashes. First, try to understand the reason behind the crash. Avoid making immediate decisions out of fear. Take time to review your portfolio, investment horizon, financial goals and existing exposure. Then, evaluate whether your individual holdings are still suitable considering the current market conditions, or whether the decline has changed the reasons behind your original investment decisions.

Should I sell my stocks during a market crash?

Not necessarily. That would actually lock in losses as the prices have fallen. However, you may consider selling your holdings if the fundamentals of the company have deteriorated or the investment logic is no longer valid.

Is a market crash a good time to invest?

A market crash can create opportunities to invest, as many instruments may trade at lower prices. But a lower price doesn’t simply make the investment worth putting your money in. Analyse the fundamentals, valuation, risk and your investment horizon before investing during a market crash.

Should I continue my SIP during a market crash?

When you invest through an SIP, you put in regular investments at predetermined intervals. Over the longer horizon, your investment period factors in short-term market movements by default. So, when you continue with your SIP during a market decline, you can purchase more mutual fund units using the same capital as the NAVs are lower. Simply review whether the SIP fits your financial goals and investment horizon and continue with it.

How can I protect my portfolio during a market crash?

During a market crash, you can protect your portfolio by maintaining adequate diversification. Check your portfolio for concentration and spread out your assets strategically. Review individual stocks in which you invested and avoid excessive leverage to manage risk.