What to Do When the Stock Market Drops
The market’s dropping, and your portfolio’s taking a hit. If you’re like most investors, your first instinct might be to panic—maybe even pull everything out and wait it out in cash.
But before you make a move, take a breath. Let’s talk strategy.
The S&P 500 is now down more than 15% from its recent high. That means a $100,000 account might be sitting at $85,000 today. But this isn’t the time to get emotional. It’s time to get smart.
Here are three critical things you should do when the market drops—because corrections are part of the cycle, and smart investors use them to build wealth, not lose it.
1. The Market Always Comes Back
Let’s get this straight: the market always recovers. That’s not wishful thinking—it’s data.
In the last 20 years, the S&P 500 has experienced 26 market corrections. That’s more than one a year. In 2022, the S&P dropped 27%… and came back within 282 days. In 2024? A 6% dip. Again, it bounced back.
Today we’re in a 15% correction. History tells us what happens next: recovery.
If you’re a long-term investor, the worst move you can make is panic-selling at the bottom. Wealth is built by staying the course through the downturns—because that’s how you’re still holding the bag when it starts climbing again.
That said, not every sale is a panic move. Which brings us to…
2. Use the Downturn to Your Advantage: Tax Loss Harvesting
Let’s add some nuance here: not all selling is bad. Smart investors know how to use a market decline to create opportunity—without abandoning their investment strategy.
Enter: tax loss harvesting.
Let’s say you bought $300,000 of an S&P 500 index fund. It’s now worth $255,000. If you sell today, you lock in a $45,000 capital loss.
That $45,000 can be used to offset capital gains from other investments—reducing your tax bill now or in future years.
But here’s the key: you’re not leaving the market. You take that $255,000 and reinvest it in a similar (but not identical) fund—maintaining your market exposure, while locking in the tax benefit.
This is not panic selling. It’s strategic repositioning.
Just make sure you avoid the wash sale rule—you can’t buy back the exact same fund within 30 days. Work with your advisor to choose a comparable asset.
3. Re-Evaluate Your Allocation: Are You Too Heavy in Stocks?
If this downturn has you sweating bullets, it might be a sign that your portfolio is overallocated to the stock market.
And here’s a stat that should make you pause:
- Mass affluent investors (net worth ~$1M) have 86% of their portfolio in stocks
- High-net-worth investors (net worth over $10M) have just 19% in stocks
What’s in the rest of their portfolio?
- Real estate
- Private equity
- Private funds
- Oil & gas
- Crypto
- Other alternative assets
The ultra-wealthy diversify intentionally—and for good reason. These assets often deliver higher returns with lower volatility than the public markets.
Even JP Morgan agrees: their recommended “modern portfolio” now includes:
- 40% stocks
- 30% bonds
- 30% alternatives
At Directed IRA, we’ve helped thousands of investors shift their retirement dollars into alternatives—real estate, private funds, even crypto. These are all assets your IRA or 401(k) can legally own through a self-directed account.
