What to Do When Stocks Drops
Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.
Make yourself at home. We'll get to stock market drops in a moment.
But first - here are some links you may want to save for later.
Risk Capacity Matters More Than Risk Tolerance
Get a HELOC Before Retirement?
Now, let's get on to the blog! 😀
Three Parts
It can be scary when markets fall.
Our net worth dips. We have fewer resources available. There’s no way to know how far stocks will fall.
However, things may not be as bad as they seem. There are steps you can take.
This article has three sections:
Not as Bad as the Headlines
Back to Basics
Current Opportunities
1. Not as Bad as the Headlines
No Major Changes
It’s important to put a stock market drop in perspective.
Often, nothing really important has changed.
Health
Health is wealth. Worrying about money could impact that!
It may help to:
go for a walk,
take a hike,
work out…
Physical activity can improve your mental state.
Community
Now could be a good time to lean into your network:
spend time with friends and family members,
connect with acquaintances, or
help out neighbors.
A down market isn’t the end of the world!
Consider April 4th, 2025. The market had fallen about 10% in two days following President Trump’s tariffs.
As usual, I took my daughter to swim practice in Seattle and then walked our dog to Volunteer Park. It was a beautiful day!
Friend groups were picnicking on blankets. We stopped several times for good conversations… and belly rubs!
The stock market never came up. It simply wasn’t as important as living in the moment.
Goals and Situation
Consider whether anything fundamental has changed:
Have your goals shifted?
What about your income?
Do you need the money any sooner?
Time Horizon
People almost always need investment growth to achieve their goals.
The longer someone has before they need the money, the more time they have for investments to recover.
That’s why short-term goals need to be funded with stable assets like high-yield savings, money market mutual funds, and cash.
Money needed later can be invested for long-term growth.
Risk Tolerance
It’s easy to say we’re willing to take risk when stocks are rising. However, risk tolerance is really how we feel and what we do when markets fall.
There’s a saying: smooth seas don’t make skilled sailors.
Part of the Process
There was one (1) official recession from the middle of 2009 through March 2025. That was the brief drawdown caused by the COVID-19 pandemic in early 2020.
An entire generation of American investors has never experienced a prolonged recession!
Each market correction starts a little different. However, they all seem to end about the same.
Stock markets fall from time to time. it’s a natural part of the process! Investments with less risk typically earn a lower return.
Volatility is the price we pay for the returns we want.
Allocation
Net worth often falls less than the stock market. Fortunately, not all of our eggs are in that basket!
Allocation is a fancy term for how much someone has invested in asset types like:
U.S. stocks,
international stocks,
bonds,
real estate, and
cash.
An investor’s target allocation depends on their:
goals and situation,
time horizon, and
risk tolerance.
It does not depend on what’s going on in the market!
Reserve Fund
A cash reserve fund is important in case of unexpected:
emergencies and
opportunities.
Emergencies
Things happen. A:
vehicle gets a flat tire,
roof starts to leak,
layoff occurs…
Reserves can be the difference between “Oh, no!” and “Oh, well.”
Opportunities
Some changes are welcome:
a company may offer a discount for pre-paying expenses,
friends may plan a once in a lifetime vacation, or
an adoption may be approved.
It’s important to prepare for both positive and negative surprises!
Limited Downside
Reserve funds need to be held in relatively safe assets like:
checking,
savings,
high-yield savings,
money market mutual funds,
certificates of deposit (CDs), etc.
Those investments generally hold their value well. Some of them are even paying interest of about 4% a year.
Better yet, their value isn’t directly impacted by the stock market.
Bonds
Governments and businesses issue debt called bonds.
They usually pay an ongoing interest rate and then return the original amount borrowed some time in the future.
The price of a bond depends in part on the:
interest rate,
risk of the borrower, and
time until the money will be repaid.
Risk
The riskier the borrower, the lower the chance an investor will be paid.
A higher risk borrower must pay a higher interest rate to attract investors. For instance, interest rates on corporate bonds are generally higher than those of U.S. government bonds.
Time to Maturity
How long a bond has until the original amount borrowed is due is called its maturity.
A bond scheduled to be repaid in 10 years usually has more risk than one maturing in a few months. There’s also the risk of inflation and interest rate changes.
As a result, bonds maturing later tend to pay higher interest than those scheduled to be repaid soon.
Market Rates
Bond prices typically:
fall when market interest rates rise and
rise when market interest rates fall.
Higher Interest Rate
Consider an investor who buys a bond paying 6% interest.
Market interest rates then rise - driving the market interest rate for the bond up to 7%. That’s unfortunate for the investor! They’re earning less than the market rate for the bond.
To attract a buyer, they would need to sell the bond at a discount.
The longer until the bond matures, the more the its price generally falls. An investor would rather it mature now!
Lower Interest Rate
The opposite is true when interest rates fall.
An investor would be happy to earn 6% when the market rate for a bond is 5%. They’d want that to continue as long as possible!
The bond would command a premium. Its price would rise.
Recession
In a recession, the economy is struggling.
The Federal Reserve has lowered interest rates during past recessions.
Lower interest rates make it less expensive for businesses and individuals to borrow. They start new projects, which stimulates the economy.
Interest Rate Impact
All else equal, bond prices rise when interest rates fall.
Higher Default Risk
However, the economy’s not doing well.
The odds a borrow may miss payments (default) could rise.
Flight to Safety
When stocks fall, some investors get spooked and move money to more stable investments. They may flee from riskier stocks to safer bonds.
That shift could increase the price of bonds.
Mixed Impact
Whether bond prices rise or fall depends on the size of the effects:
increase from lower rates,
decrease from higher default risk, and
increase from a flight to safety.
More Conservative
The relative stability of bonds has another feature: a portfolio may become more conservative after a stock market drop.
Example
Assume an investor had $100,000 invested in a 60/40 split. That’s 60% stocks and 40% bonds.
They had roughly:
$60,000 invested in stocks and
$40,000 invested in bonds.
Assume stocks fall 10% and bonds hold their value.
Their total investments would fall about 6% to $94,000:
$54,000 stocks (10% off $60,000) and
$40,000 bonds.
That shifts their investment allocation to about:
57% stocks ($54,000 / $94,000) and
43% bonds ($40,000 / $94,000).
Their portfolio automatically became more conservative!
Rebalance
Their investments could be rebalanced back to their target of 60% stocks and 40% bonds.
They would need to:
sell about $2,400 of bonds and
buy about $2,400 of stocks.
That would shift their portfolio to:
$56,400 stocks (60% of $94,000) and
$37,600 bonds (40% of $94,000).
By rebalancing, investors can systematically:
buy stocks when they fall and
sell stocks when they rise.
Target Date Funds
Some investments automatically rebalance.
Target date funds are often available in retirement, education, and taxable brokerage accounts.
How It Works
Target date funds have a multi-year investment plan based on when the money will be needed.
Two common examples are:
when a student expects to enroll in college and
when an employee expects to retire.
Target date funds become more conservative as the “use by” date approaches.
Shifting Allocation
Here’s an example from Vanguard:
The graph is a bit more complicated than what we’ve discussed.
U.S. stocks refer to shares of companies headquartered in the United States.
International stocks refer to shares of companies headquartered outside the United Sates.
U.S. nominal investment-grade refer to bonds of high-quality borrowers like the U.S. government and thriving businesses.
Treasury Inflation-Protected Securities refer to debt issued by the U.S. Treasury which pays more interest when inflation is higher and less interest when inflation is lower.
Cash refers to cash and cash-equivalents like high-yield savings and money market mutual funds.
Over time, target date funds automatically shift:
form U.S. and international stocks
to bonds and cash.
This can be especially helpful for “set it and forget it” accounts.
Disaster Avoidance
Consider a 529 plan set up by a parent for their newborn child. The account’s expected to pay for college in about 18 years. The parent might choose the target date enrollment investment option.
Initially, most of the target date fund will be invested in stocks to hopefully benefit from growth. Over time, the fund invests a higher percentage in cash and bonds.
40% Stock Market Drop
Imagine stocks fall 40% just before the student heads off to college.
If the account was only invested in stock, it might lose 40%!
A student who previously had four years of college funded might run out early their Junior year.
Less Severe
However, a target date fund that’s slowly become more conservative over 18 years might fall less. That’s a feature!
Target date funds are designed to allocate assets thoughtfully for decades.
Drawbacks
Three downsides to target date funds include:
high fees,
generic allocations, and
inflexibility.
High Fees
The fees charged by target date funds vary considerably.
It’s important to review the annual expense ratio of each investment. These fees are automatically deducted from the investment.
An expense ratio:
less than 0.1% is pretty good and
above 0.5% is expensive.
Hidden annual fees might even exceed 1%. One target date fund might be ten times (10x) as expensive as another!
Generic Allocation
The “hands off” approach can be good. However, a target date fund uses an investment plan for the average investor.
Consider a 529 plan for two high school Seniors:
Student 1 attends a private high school, has no interest in graduate school, and has plenty saved in their account.
Student 2 attends a public high school, plans to attend graduate school, and doesn’t have much saved in their account.
It may make sense to invest Student 1’s account more conservatively since they:
can use the funds for high school tuition now,
have enough to cover four years of undergrad, and
may not pursue further education.
Student 2’s investments may need to be more aggressive since they:
aren’t using the funds now,
don’t have enough saved for college, and
will likely need funds for graduate school.
The default target allocation may not be ideal for either student!
Inflexibility
Target date funds also don’t adapt to changes in goals or situations.
A student may:
unexpectedly attend a private high school or
receive a college scholarship.
An employee may:
experience a health setback which requires them to retire early or
find a passion late in their career that happens to pay well.
Major changes may require a different allocation.
Real Estate
Real estate may also provide a buffer when stocks drop.
Home
The value of someone’s home depends on local supply and demand.
A prolonged recession could cause nearby layoffs. Living near a major company’s headquarters could be risky.
However, people still need somewhere to live. If they’re unable to own a home, they’ll likely rent.
Market rents help set a floor for home prices.
Investment
However, rent has an an even more direct impact on real estate investments.
Investors value a property based on its expected return. Lower interest rates can reduce the cost to finance and purchase a property.
The value of both personal use and investment real estate may fall less than the stock market.
Section Summary
Net worth often doesn’t fall as much as the stock market.
Other assets may be less impacted like:
cash reserves,
bonds,
target date funds, and
real estate.
2. Back to Basics
It feels completely unsatisfactory to do nothing when the market dips. That energy can be used to focus on the basics!
Insurance
Insurance companies often pounce during market corrections. They tout the benefits of limiting risk.
It may help to remember that insurance agents:
aren’t usually comprehensive financial planners and
are paid on commission.
They might receive the entire first year payment of a whole life policy.
However, it still makes sense to double-check insurance coverage.
Life and Disability
When young, we can work many more years.
Over time, we trade:
our human capital (hours)
for financial capital (money).
Hopefully, we save and invest some along the way!
Future Earnings
However, we have a lifetime of earnings to lose.
That’s when life and disability insurance are often most important. We must protect ourselves and our loves ones.
Future Expenses
As we age, our future lifetime expenses shrink:
the number of years we have left to live falls and
our family (hopefully) becomes less dependent on our income.
Net Worth
Also, our net worth typically grows. A larger percentage of our future expenses may be covered by our existing assets.
Therefore, the amount of life and disability insurance we need may fall.
Health
Now may be a good time to schedule a:
routine physical,
dentist appointment, or
eye exam.
Preventive care can save a lot of money - and pain!
Current Insurance
It’s also worth reviewing health-related insurance.
Do you typically use it?
It not, it may make sense to switch to a lower premium plan.
Do you have more money now than you use to?
If so, it may be possible to lower premiums by moving to a higher co-pay or deductible plan.
Health Savings Account
If a qualified high-deductible health plan is right for you, it may make sense to contribute to a Health Savings Account (HSA).
Unlike spending and reimbursement accounts, a Health Savings Account isn’t use it or lose it.
HSA contributions may be triple tax advantaged. They may:
lower taxable income the year contributed,
grow tax-free, and
pay for qualified medical expenses tax-free.
However, it’s important not to let the tax tail wag the healthcare dog! Having the right health insurance is crucial.
Future
Now could also be a good time to estimate future healthcare expenses.
Affordable Care Act
The Affordable Care Act (ACA) lowered health insurance costs for millions of Americans. These plans are offered on state exchanges.
Better yet, the premiums are based on income - not net worth. Multi-millionaires can receive subsidies if their income is low enough.
Medicare
Health coverage is available through Medicare once someone turns 65.
A family friend is wealthy enough to have been invited to join a group bidding to buy the Chicago Cubs. They considered Medicare the best health insurance they’d ever had.
Many people overestimate future health insurance costs. It’s worth checking what your premiums might be today if you stopped working.
For more, check out: How Americans Spend.
Auto
The opposite may be true for auto insurance. Coverage may be an order of magnitude too low!
Underinsured
Many people carry insurance coverage of $10,000 to $50,000.
The U.S. Department of Transportation estimated the cost of a fatal crash at nearly $13 million.
That would wipe almost anyone out financially!
Overpaying
Also, many Americans:
haven’t shopped their auto insurance in years,
have low deductibles even though they could afford to pay for smaller incidents, and
aren’t taking advantage of prepay discounts.
It may be possible to increase coverage and pay a lower premium!
Home
Housing prices have risen significantly in recent years. Unfortunately, insurance coverage hasn’t kept pace for many homeowners.
If you own a home, it’s worth checking that it’s fully insured.
Umbrella
There’s insurance that sits on top of other insurance types.
Umbrella insurance covers amounts above other coverage limits like home and auto.
Since it’s used infrequently, it’s relatively affordable. A $1 million policy may only cost $200 to $400 a year.
A general guideline is to have $1 million of umbrella coverage for every $1 million of net worth. Of course, it depends on the situation.
Job Security
A down market is a good time to focus on job security.
Performance
Strong results help. You’ll either be rewarded by your:
current employer or
another one.
I suggest people update their resume or CV at least once a year. Quantify your impact wherever possible.
Mentorship
Other people have great perspectives.
It’s important both to have and be a mentor!
Knowing where to focus can make all the difference. Also, helping others grow is a key part of our development.
Skill Development
A recession is a great time to level up skills.
Many employers offer tuition reimbursement for classes.
You can also study topics that interest you through:
books,
podcasts, and
videos.
Higher Income
These and other efforts can grow income.
Raise or Promotion
New skills improve marketability.
However, employers have an interest to lower their labor costs to:
improve profitability or
maximize their impact.
It’s important to know your value on the open market. Sites like Glassdoor and Levels FYI share data from other company employees.
While imperfect, that’s a decent starting point.
Compensation primarily depends on:
position,
location, and
negotiation.
Consider what you’d like for your career. Your best move may be a lateral move or some other development opportunity.
For more, check out How Salary is Calculated.
Better Interest Rate
It may be possible to earn more on low-risk investments.
Cash slowly loses its value to inflation. Many checking accounts earn a return that rounds to 0%.
However, some high-yield savings and money market mutual funds are earning over 4% a year.
That could be an extra:
$400 a year on $10,000,
$2,000 a year on $50,000, and
$4,000 a year on $100,000.
Side Hustle
Another option for extra income is a side gig.
A part-time job can be a great way to earn more while doing something you love. It might also be a great workout. Above all, the gig could be a way to explore options for later in life.
The position will likely need to be disclosed to your full-time employer. It’s important not to let it impact your performance.
There’s a chance of burnout. Adding a part-time job on top of a full-time (or more!) position can be overwhelming.
Lower Expenses
Another potential step when the market dips is to review expenses.
Zero-Based Budget
One method is to justify every cost.
When my wife and I do, we almost always find something:
a zombie subscription we thought we’d cancelled,
something we no longer use, or
even fraud!
It’s also worth taking a hard look at:
fees and interest on debt and
interest and penalties on taxes.
Products Instead of Services
Tech companies have shifted from selling products to ongoing services.
Doing the opposite may help reduce expenses!
For instance, it could make sense to:
own a car instead of leasing one,
buy a router instead of renting one from the cable company, or
use a pressure cooker instead of ordering out for dinner.
Better Life at Home
Lavish vacations can be a major family expense. While the experience is great, there’s nothing of value left after the trip.
It may be possible to build a life they don’t feel the need to escape.
Home
Upgrading a home can make it more enjoyable. A remodel may add to the home’s value - making it an investment instead of an expense.
Community
Spending time with neighbors, friends, and family members can be immensely rewarding. It might also cost next to nothing.
Health
Focusing on health can pay dividends, including:
more energy,
fewer medical expenses, and
a better physique.
Section Summary
It may be possible to focus any nervous energy on the basics:
check coverage limits and shop insurance,
deliver results and level up professional skills,
earn more with a raise, higher interest rate, or a side hustle,
review expenses, replace services with products, or enjoy home.
3. Current Opportunities
There are silver linings when the stock market drops.
Higher Potential Returns
If the only change for an investment is a price drop, the expected return may rise.
Assume an investment worth $60,000 pays dividends of 2% a year. The investment would pay about $1,200.
Imagine the price of the investment falls 10% and nothing else changes. It would still earn about $1,200 a year in dividends.
However, the yield would rise from 2% to over 2.2% ($1,200 / $54,000).
Dollar Cost Averaging
There could also be good news for investors who buy consistently through market volatility:
when prices fall, they buy more and
when prices rise, they buy less.
This process can lower the average cost.
Example
Take someone who invests $1,000 each month.
Assume the price of a stock they buy is volatile:
$50 the first month,
$40 the second month, and
$50 the third month.
Investing $1,000 a month, they would buy:
20 shares the first month,
25 shares the second month, and
20 shares the third month.
65 shares would be purchased at an average cost of $46.15. Their unrealized gain would be $3.85 per share, or about 8%.
However, the stock price was the same $50 at the start and end. Owning the stock for three months may have had no return!
Also, the average purchase price of $46.15 is a bit lower than the average of the three monthly prices ($46.67).
That’s dollar cost averaging.
Savers
I get excited for clients who continue to invest when the stock market drops. They’re buying shares at a discount!
Past performance is no guarantee of future results.
Nonetheless, stock indices have generally risen over time. A long-term investor has a good chance to earn a solid return.
A market drop can also help check investor apathy and overconfidence.
Retirees
Recent retirees may be impacted most by a market downturn.
A poor return immediately after retiring could have lasting impacts if they’re forced to sell when values are low. It’s a sequence of returns risk.
Faster Diversification
Wealthy individuals often own a lot of one investment. That may be how they built their wealth!
However, getting wealthy and staying wealthy are two different things.
A price drop can help someone diversify out of a single stock quicker by reducing the tax impact of selling.
Appropriately Conservative
The risk of a stock market drop is why I work to make portfolios more conservative before someone retires.
It often makes sense for a pre-retiree to:
increase the reserve fund and
buy more bonds.
These are protective measures.
Home Equity Line of Credit
Someone planning to retire soon who has significant home equity may be ahead to take out a Home Equity Line Of Credit (HELOC).
It can be:
easier to get approval while still working and
could come in handy.
Living Expenses
One use case may be a market downturn soon after retirement. Using a HELOC for living expenses could give investments time to recover.
Lower Interest Rates
Also, interest rates often fall during a recession. Home Equity Lines of Credit typically have variable interest rates.
It’s rare for money to become less expensive when it’s needed most. However, that may be the case with a HELOC in a recession!
Drawbacks
Using a HELOC may restrict cash flow for years. It could also increase the risk of foreclosure.
Whether to use one depends on the situation.
Section Summary
Silver linings of a market drop may include:
higher expected returns,
dollar cost averaging, and
buying at a discount.
Recent retirees may be the most impacted. However, the pullback could facilitate diversification. The drop may also be mitigated by appropriate conservatism or a Home Equity Line Of Credit.
Hey, thanks for reading my post about what to do when the stock market drops.
Just a reminder, I share a lot of resources that can help you.
Disclaimer
In addition to the usual disclaimers, neither this post nor these images include any financial, tax, or legal advice.
