what to do when stocks go down — A Guide

What to Do When Stocks Go Down

When asking "what to do when stocks go down," investors seek clear, practical steps to protect portfolios, manage cash needs, and act without panic. This guide explains definitions, common causes, historical recovery patterns, portfolio actions, tax-aware moves, behavioral tips, and a compact checklist you can use during market declines. It is written for individual investors, retirement savers and portfolio managers. Expect actionable ideas you can adapt to your time horizon, risk tolerance, and use of Bitget products for custody and trading.

Overview of Market Downturns

A market downturn is any period when broad equity prices fall. Understanding terminology and likely drivers helps answer what to do when stocks go down more calmly and effectively.

Definitions and thresholds

• Market pullback: a mild decline, often single‑digit percentage drops from recent highs.
• Correction: commonly defined as a roughly 10% decline from recent peaks.
• Bear market: a decline of about 20% or more from highs and usually associated with extended negative sentiment.
• Crash: a very sharp fall over days or weeks, often with outsized intraday moves.

Regulated markets use circuit breakers and trading halts to prevent disorderly selling. These tools pause trading when index moves exceed predetermined thresholds, giving participants time to reassess before trades continue.

Typical drivers of downturns

Common causes of declines include:

• Macroeconomic shocks: interest rate changes, inflation surprises, or recession risk.
• Monetary policy shifts: central bank rate decisions and guidance.
• Geopolitical events or major policy shifts.
• Corporate earnings disappointments or widespread sector stress.
• Liquidity or credit problems that reduce market depth.
• Sentiment swings amplified by headlines or algorithmic trading.

Each drop can mix several drivers; identifying dominant causes helps set appropriate tactical responses.

Historical Context and Market Recoveries

Historically, markets have experienced frequent pullbacks and corrections. Recoveries occur but timing and path vary. Short, sharp declines may reverse in weeks; deeper bear markets can take months or years to recover. Past performance does not guarantee future returns, but long‑term historical data show equities have rewarded patient investors over decades.

Investment Principles to Follow During Downturns

Start with principles that shape any tactical decision about what to do when stocks go down.

Don’t panic — emotional discipline

Panic selling often crystallizes losses. Emotional reactions can cause investors to sell low and miss recoveries. Take steps to delay impulsive trades: impose a waiting period, consult a checklist, or contact a trusted advisor.

Time in market vs timing the market

Evidence shows that staying invested (time in the market) generally outperforms repeated attempts to time entries and exits. Missing a small number of best market days can dramatically reduce long‑term returns.

Portfolio Actions and Strategies

When answering what to do when stocks go down, specific portfolio moves depend on your objectives and constraints. Here are common, practical strategies with benefits and trade‑offs.

Review goals, time horizon and risk tolerance

Reassess whether your original plan still reflects:

• Investment goals (retirement, purchase, education).
• Time horizon until funds are needed.
• Emotional and financial capacity for further losses.

If goals or circumstances changed, adjust the plan deliberately rather than reactively.

Rebalance and asset‑allocation adjustments

A systematic rebalance returns your portfolio to target allocations by trimming assets that outperformed and adding to assets that fell. During declines, rebalancing can be a disciplined way to buy cheaper equities while maintaining overall risk control.

If the downturn reveals a sustained shift in risk (for example, higher volatility across equities for an extended period), consider modest, carefully evaluated allocation shifts — not wholesale changes driven by fear.

Diversification and correlation management

Diversify across asset classes (stocks, bonds, cash), sectors and geographies to reduce sensitivity to any single shock. Note that correlations can rise in crises, reducing diversification benefits temporarily; that’s why multi‑asset allocations and alternative defensive holdings matter.

Dollar‑cost averaging and continuing contributions

Maintaining regular contributions (dollar‑cost averaging) during declines reduces average purchase costs over time and avoids poor timing decisions. If you have automatic payroll or recurring investment plans, keep them running unless your financial situation forces a pause.

Adding to positions opportunistically (buying the dip)

Buying during declines can be attractive if you follow specific criteria:

• Company or fund fundamentals remain intact.
• Valuation improved relative to fair value.
• Sufficient liquidity to hold through recovery.

Avoid indiscriminate “catching a falling knife”; prefer staged purchases or limit orders and ensure capital used for additions is not needed for near‑term expenses.

Hedging and downside protection

Hedging tools include options, inverse instruments, short positions, higher allocation to high‑quality bonds, or increased cash. Hedging has costs (premiums, negative carry, complexity). For most long‑term investors, simple portfolio measures (rebalancing, cash buffers) outperform complex hedges unless you have expertise or professional support.

Using stop‑losses and limit orders — pros and cons

Stop‑loss orders can limit losses but may trigger sales during volatile swings and remove you from positions that would have recovered. If used, place stops thoughtfully and understand they don’t prevent overnight gap risk. Limit orders can help enter positions at set prices but may not fill if markets move quickly.

Cash Management and Emergency Planning

Maintaining liquidity is essential so you’re not forced to sell into a downturn.

• Emergency fund: aim for a cash buffer covering several months of expenses; those with job risk or near‑term liabilities may hold longer durations.
• Short‑term buckets: keep funds for predictable near‑term withdrawals in conservative, liquid instruments (high‑quality short‑term bonds, money market equivalents).
• Avoid using retirement or long‑term investments to fund short‑term needs.

Having cash reduces the need for panic selling and gives flexibility to add to investments on opportunity.

Tax and Account‑Level Considerations

Tax rules can turn losses into future benefits when handled correctly.

Tax‑loss harvesting

Selling underperforming holdings to realize losses can offset capital gains and reduce current tax liabilities. Key points:

• Use losses to offset gains now and carry forward excess losses where permitted.
• Be mindful of wash‑sale rules that can disallow deductions when repurchasing the same or substantially identical security within a specified period.
• Document transactions and consult a tax professional for jurisdiction‑specific rules.

Roth conversions and tax planning opportunities

Market dips may create attractive windows for Roth conversions (moving funds from tax‑deferred to tax‑free accounts) because lower account values mean less tax due on conversion while retaining the long‑term tax advantage of future growth being tax‑free. Evaluate with tax scenarios and professional advice.

Advice for Different Investor Profiles

What to do when stocks go down varies by investor type. Below are tailored suggestions.

Young investors / long horizon

• Stay invested: long time horizons dampen short‑term volatility.
• Higher equity allocations often make sense; use downturns to accumulate shares.
• Continue contributions and consider opportunistic buys when fundamentals are strong.

Near‑term goals and retirees

• Reduce sequence‑of‑returns risk by maintaining a larger cash or fixed‑income cushion.
• Reassess withdrawal rates; temporarily lowering withdrawals can preserve portfolio longevity.
• Consider laddered bonds or guaranteed income products for near‑term needs.

Active traders and short‑term investors

• Use strict risk controls: position sizing, stop rules, and a pre‑defined playbook.
• Volatility can create opportunities but also rapid losses; keep leverage modest.
• Maintain discipline to avoid doubling down on losing trades without a plan.

Behavioral and Psychological Considerations

Behavioral biases shape decisions during declines. Address them directly.

Common biases

• Recency bias: overweighting recent performance and assuming it will continue.
• Loss aversion: the pain of losses feels larger than joy from equivalent gains, prompting irrational selling.
• Herding: following mass actions can lead to selling near bottoms.

Creating a pre‑defined downturn plan

Write an action checklist in advance covering triggers, acceptable allocation changes, liquidity targets, and a waiting period before major trades. A written plan reduces impulse decisions when stress is high.

Common Mistakes to Avoid

• Panic selling that locks in losses.
• Ignoring diversification and concentrating risk.
• Overtrading or frequent market timing attempts.
• Forgetting tax consequences (e.g., wash‑sale violations).
• Letting headlines dictate portfolio moves.

Special Considerations for Cryptocurrencies Compared to Stocks

Crypto markets have higher volatility and different market structures and custody considerations. When considering what to do when stocks go down and you also hold crypto:

• Treat crypto as a separate risk allocation with a higher tolerance for volatility.
• Use reputable custody solutions — prefer Bitget Wallet for secure storage and Bitget for trading execution.
• Be aware of distinct tax treatment and reporting for crypto in many jurisdictions.
• Strategies like diversification, position sizing and liquidity planning still apply, but expect larger swings and faster market moves.

When Selling Might Be Appropriate

Selling during a downturn can be rational under clearly defined circumstances:

• Fundamental deterioration: the investment’s business model or solvency materially worsens.
• Personal circumstances change: urgent cash needs, job loss, or a shortened time horizon.
• Tax‑loss harvesting executed within a plan.

If selling, document the rationale, consider staged exits, and avoid emotional, wholesale portfolio liquidation.

Practical Checklist for Investors During a Market Downturn

Use this compact checklist when deciding what to do when stocks go down:

1. Pause and assess — wait 24–72 hours before major moves.
2. Check emergency fund and short‑term liquidity.
3. Reconfirm goals and time horizon.
4. Review current asset allocation vs. target.
5. Consider disciplined rebalancing or staged purchases.
6. Evaluate specific holdings for fundamental changes.
7. Look for tax opportunities (harvesting or conversion windows) with professional advice.
8. Document decisions and, if uncertain, consult a licensed financial or tax advisor.
9. Use trusted platforms — for custody and trading consider Bitget and Bitget Wallet for secure, regulated access.

Tools, Resources and Professional Help

Useful tools and professionals:

• Broker research platforms and account statements for position-level data.
• Automated rebalancing tools and robo‑advisors for disciplined allocation management.
• Financial planners and fiduciary advisors for personalized plans.
• Tax professionals for harvesting and conversion rules.
• Institutional‑grade custody and wallet services; for crypto use Bitget Wallet and Bitget exchange services where appropriate.

Seek a professional when changes are large, tax rules are complex, or your personal situation shifts materially.

Further Reading and Notable Perspectives

Recommended sources for deeper study include investor education pages from large asset managers and financial education publishers, long‑form analysis from reputable institutions, and classic works on investing discipline. When reading, prioritize neutral, evidence‑based materials and jurisdiction‑specific tax guidance.

References and Evidence Base

This guide synthesizes best‑practice investor guidance and historical data from major industry sources. It reflects frameworks used by investment firms and personal‑finance educators. For timely context, consider recent market and economic reporting.

As of 16 January 2026, according to PA Media (PA Wire), lenders reported the largest jump in credit‑card defaults in nearly two years and mortgage demand showed the sharpest fall in two years — indicators that many households face rising financial stress. The same reporting noted UK GDP growth of 0.3% for November 2025 and mixed market moves in early trading: the FTSE 100 rose modestly while US indexes opened higher with the Dow up about 0.4%, the S&P 500 up roughly 0.6% and the Nasdaq Composite up about 0.7% on that day. These data points illustrate how macro and consumer credit trends can interact with equity markets and household liquidity, reinforcing why emergency funds and careful liquidity planning are vital when deciding what to do when stocks go down.

Sources used for framing and recommended practices include investor guidance from major asset managers and broker education (for example, firms’ client education pieces on rebalancing, tax‑loss harvesting, and risk management), academic and historical data on market recoveries, and contemporary market reporting noted above. Always verify jurisdiction‑specific tax rules before acting.

Appendix A: Example Scenarios and Case Studies

Scenario 1 — Young investor, long horizon

• Age 30, regular monthly contributions, target retirement in 35+ years. During a 15% market correction, the investor keeps automatic contributions, adds a small opportunistic purchase to a diversified ETF, and documents the decision. Expected outcome: lower average cost per share and improved long‑term return potential.

Scenario 2 — Retiree with near‑term withdrawals

• Age 67, planning withdrawals to cover living expenses for the next 3 years. During a 20% equity drop, the retiree increases cash and short‑term bond allocation to cover the next 36 months of withdrawals, reduces equity exposure slightly, and delays discretionary large purchases. Expected outcome: reduced sequence‑of‑returns risk and preserved portfolio longevity.

Scenario 3 — Tax‑loss harvesting example

• Investor holds a taxable account with several positions trading below purchase price. They sell the losers to realize capital losses, offset gains elsewhere in the year, and use the freed cash to buy a broadly similar but not substantially identical fund to avoid wash‑sale rules. Expected outcome: current tax benefit and continued market exposure.

Each scenario follows a plan aligned to goals and constraints rather than emotion.

Appendix B: Glossary

• Bear market: ~20% decline from peak.
• Correction: ~10% decline from peak.
• Dollar‑cost averaging: investing a fixed amount regularly.
• Rebalancing: returning a portfolio to target allocation percentages.
• Tax‑loss harvesting: realizing investment losses to offset taxable gains.
• Sequence‑of‑returns risk: the risk that poor market returns early in retirement impair long‑term portfolio sustainability.

Final Notes and Next Steps

When considering what to do when stocks go down, the most useful responses are those aligned with your financial plan, time horizon and liquidity needs. Pause, consult your checklist, and avoid headline‑driven reactions. If you use crypto alongside equities, treat it as a separate risk bucket and prefer secure custody solutions like Bitget Wallet alongside regulated trading via Bitget.

Ready to organize a downturn playbook? Start by documenting your goals, emergency‑fund target, and a simple rebalancing rule. For custody and trading, explore Bitget features and Bitget Wallet to manage liquidity and custody securely. If you need tax or investment strategy tailored to your situation, contact a licensed professional.