How to prepare your portfolio for the market downturn everyone expects
Crashes are normal. Investors who avoid panic, keep contributing and plan for income needs can emerge ahead when markets recover.
Copy link
By Torontoer Staff
Market declines are inevitable: sell-offs of at least 30 per cent happen roughly every decade, and deeper drops occur less often. That makes preparation a practical priority, not an optional exercise. Investors who plan ahead, avoid panic and keep up regular contributions tend to recover faster and can even profit by the time markets bottom out.
This guide summarises the evidence and offers concrete steps to preserve capital, capture opportunity and protect income if the market falls by 30 to 50 per cent.
Stick with dollar-cost averaging
Dollar-cost averaging means investing a fixed amount at regular intervals. It forces discipline and buys more shares when prices fall and fewer when prices rise. The effect is automatic rebalancing into cheaper assets without timing the market. For example, an investor with a $100,000 portfolio who kept investing $500 a month through the 2007–2009 crisis would have recovered their position more than a year faster than the market. By the time the S&P 500 returned to its precrisis peak, that investor would have been roughly $10,000 ahead, despite the 50 per cent drop.
Resist the urge to sell
Losses on paper become permanent when you sell. Human instincts push toward cutting losses when accounts look bad, but history shows staying invested yields better outcomes. If you can tolerate the volatility, keeping your positions through a downturn preserves the option to benefit from the recovery.
Treat sharp pullbacks like a sale
Falling prices are not a signal to flee, they are a chance to buy at a discount. As Warren Buffett wrote during the 2008 sell-off, market declines let you “buy a slice of America’s future at a marked-down price.” Investors who moved from cash into equities during that period captured much of the subsequent upside. The S&P 500 roughly tripled over the following decade.
Buy a slice of America’s future at a marked-down price.
Warren Buffett
Protect income and employment
Being able to keep investing during a downturn depends on steady income. A bear market can spill into the real economy through lower household wealth and tighter credit, which can lead to layoffs. A Scotiabank estimate showed that a 40 per cent drop in the S&P 500, and a roughly 20 per cent drag on the TSX, could cost Canada about 70,000 jobs. If your income is at risk, prioritise emergency savings and reduce discretionary spending before reallocating into market opportunities.
Mind sequence-of-returns risk
Sequence-of-returns risk matters most for retirees and those near retirement. If you are already drawing income from a portfolio, large early losses force you to sell assets at low prices and dramatically increase the chance of depleting capital. For those clients, moving to a more conservative allocation, securing guaranteed income sources, or staging withdrawals can be sensible steps.
Practical checklist for bracing a downturn
- Set up automatic contributions to capture dollar-cost averaging benefits
- Maintain an emergency fund covering three to six months of essential expenses
- Review your risk tolerance and consider a defensive tilt if you cannot afford large drawdowns
- Avoid selling in a panic, unless you need cash for unavoidable expenses
- Keep a portion of savings in liquid investments if you expect near-term spending
- Plan withdrawals for retirees to minimise sequence-of-returns damage
What history shows
Major declines, including two 50 per cent drops in the 2000s, were severe. Yet investors who continued contributing and stayed invested saw their portfolios recover and grow over time. Drops of 40 per cent are rare and typically happen only a few times per century, but they do occur. Preparing for them is a risk-management exercise that preserves options and reduces the chance of irreversible mistakes.
A market crash is disruptive, but it is not the end of a long-term investing plan. Discipline, liquidity for short-term needs and a plan for income drawdowns give you the best chance to emerge in stronger financial shape.
investingpersonal financemarketsTSXS&P 500
