Index Fund Investing During a Market Crash: What to Do
Market crashes are terrifying. When your portfolio drops 20%, 30%, or even 40% in a matter of weeks, every instinct tells you to sell and stop the bleeding. But for index fund investors, market crashes are not disasters — they are opportunities. This guide tells you exactly what to do when markets fall and why the counterintuitive approach of staying invested or buying more is backed by decades of data.
Disclaimer: This content is for educational purposes only and does not constitute financial advice. All investments carry risk. Past market recoveries do not guarantee future recoveries. Consult a qualified financial advisor for advice specific to your situation.
First — Understand What a Market Crash Actually Is
A market crash or bear market is a decline of 20% or more from recent highs. Bear markets feel catastrophic when you are in them. But historical context is essential. The US stock market has experienced dozens of bear markets, corrections, and crashes throughout its history — including the Great Depression, the 2008 financial crisis, the 2020 COVID crash, and many others. Every single one of them was eventually followed by a full recovery and new all-time highs. Not most of them — every single one. Read our guide on What is an Index Fund? for context on how index funds participate in long-term market growth.
The Biggest Mistake: Selling During a Crash
Selling your index funds during a market crash is the single most damaging thing most investors ever do to their long-term wealth. Here is why. When you sell during a crash, you lock in your losses permanently. To recover, you then need to decide when to buy back in — and most people wait until the market feels safe again, which means buying back at higher prices after missing the recovery. Studies by DALBAR consistently show that the average investor significantly underperforms the market index they are invested in — almost entirely because of panic selling at the wrong time.
Read our guide on Dollar Cost Averaging With Index Funds to understand why automated, emotion-free investing protects you from this mistake.
What to Actually Do During a Market Crash
Option 1 — Do Nothing (The Default for Most Investors)
For most index fund investors, the correct action during a market crash is to do absolutely nothing. Do not sell. Do not check your balance daily. Continue your regular automatic contributions as scheduled. This is harder than it sounds psychologically, but it is what the data consistently supports. The market will recover. Your job is simply to still be invested when it does.
Option 2 — Keep Investing (Dollar Cost Averaging Through the Crash)
If you have regular monthly contributions set up, continue them throughout the crash. This is where dollar cost averaging truly earns its value. When the market drops 30%, every dollar you invest buys 43% more shares than it did at the peak. When the market recovers, those extra shares you accumulated at low prices deliver outsized gains. Every bear market in history has been the best buying opportunity for investors who stayed the course.
Option 3 — Invest Extra Money if You Have It
If you have extra cash that you will not need for at least 5 years, a significant market crash is one of the best times to invest it. Warren Buffett’s famous advice applies here — be greedy when others are fearful. Investing a lump sum during a significant market decline has historically produced above-average long-term returns. See Best Index Funds for Beginners for the best funds to add to during a downturn.
Historical Market Crashes and Recoveries
2008-2009 Financial Crisis: The S&P 500 dropped approximately 57% from peak to trough. Recovery time to new all-time highs: approximately 4 years. An investor who stayed invested through the entire crisis and recovery saw their portfolio more than triple over the following decade.
2020 COVID Crash: The S&P 500 dropped approximately 34% in just 33 days — one of the fastest crashes in history. Recovery time to new all-time highs: approximately 5 months. Investors who panicked and sold in March 2020 missed one of the fastest and most powerful recoveries in stock market history.
2022 Bear Market: The S&P 500 dropped approximately 25% in 2022 due to inflation and interest rate increases. Investors who continued their regular contributions throughout 2022 bought shares at significant discounts and benefited substantially from the subsequent recovery.
How to Emotionally Survive a Market Crash
Stop checking your balance daily: Watching your portfolio drop in real time makes rational decision-making nearly impossible. Check monthly at most during market downturns.
Remember your time horizon: If you are investing for retirement 20 or 30 years away, a crash today is a blip on your long-term chart. What happens in the next 12 months is almost irrelevant compared to what happens over 30 years.
Reread the historical data: When panic sets in, read about previous crashes and recoveries. Every crash felt permanent at the time. None of them were.
Automate so emotions cannot intervene: Automated monthly contributions remove the decision point from equation. The money invests automatically whether the market is up or down.
Should You Rebalance During a Crash?
A market crash may push your portfolio allocation away from your targets — for example, if stocks fall significantly, your stock allocation drops below your target while your bond allocation rises above it. This is actually a good time to rebalance — selling bonds and buying stocks — which systematically enforces the “buy low” discipline that most investors fail to maintain emotionally. Read our guide on The Three Fund Portfolio for Beginners for rebalancing guidance.
When Selling Might Be Appropriate
Selling during a crash is appropriate only if your circumstances have changed — you genuinely need the money within the next 1 to 2 years for a specific purpose, or your risk tolerance was miscalibrated and the crash revealed you cannot emotionally tolerate your current level of stock exposure. If the latter, the solution is to rebalance to a more conservative allocation — not to sell everything.
Conclusion
Market crashes test your commitment to your investment plan. The investors who succeed long-term are not those who predicted crashes — they are those who stayed invested through them. Do nothing or keep buying during market downturns, and let time and compound growth do the rest. Continue with Dollar Cost Averaging With Index Funds and How to Build a $1 Million Index Fund Portfolio.