Market Crashes: What to Do (and Not Do)

A crash is here — now what?

"Watching my account lose NT$2M in a day, I can't sleep at all."

A stock market crash is an investor's nightmare — and the main reason most people lose money. Not because of the crash itself, but because of bad decisions made during the crash.

This article revisits a few big drawdowns Taiwan investors have lived through and uses historical data to show: what to do, and what not to do.

Three modern crashes revisited

2008 financial crisis

• S&P 500: peak 1,565 in Oct 2007 → trough 676 in Mar 2009 (down 57%)
• Taiwan TAIEX: peak 9,800 in Oct 2007 → trough 3,955 in Nov 2008 (down 60%)
• Duration: about 18 months

Aftermath:

• S&P 500 reclaims the peak: April 2013 (4.5 years)
• 10 years later (2017): S&P 500 at 2,450 (doubled)
• 15 years later (2022): at 4,800 (7× from the trough)

2020 COVID crash

• S&P 500: peak 3,386 in Feb 2020 → trough 2,192 in Mar 2020 (down 35%)
• Taiwan TAIEX: peak 12,197 in Jan 2020 → trough 8,523 in Mar 2020 (down 30%)
• Duration: only 1 month

Aftermath:

• Fully recovered within 6 months
• Dec 2021: S&P 500 at 4,800 (+120% from the trough)

Lesson: this was the fastest V-shaped reversal in history. Markets cannot be timed.

2022 rate-hike bear market

• S&P 500: peak 4,818 in Jan 2022 → trough 3,491 in Oct 2022 (down 27%)
• Taiwan TAIEX: peak 18,619 in Jan 2022 → trough 12,629 in Oct 2022 (down 32%)
• Unusual: stocks and bonds fell together (due to rate hikes)

Aftermath:

• Early 2024: S&P 500 back to 4,800
• Late 2024: S&P 500 above 6,000

Long-term data: markets always come back

US market history (S&P 500):

Even including the big crashes, long-term buy-and-hold annualized returns are still strong. The key is "long term."

The worst decisions during a crash

1. Panic selling

Classic mistake:

• Market drops 20%, you sell "to avoid further losses"
• Months later, it rebounds — without you
• Locked-in losses, missed the rebound

Data: Fidelity research found that after panic-selling in 2008, 90% of those investors never re-entered the market, missing the 2009–2023 long-term bull run.

2. Switching to "safer" assets

Classic mistake:

• Sell ETFs, move to a time deposit
• Still sitting outside when the market rebounds
• Time-deposit yields 1–2%, market long-term 7–10%

10-year gap: millions of NT$.

3. Using leverage to "buy the dip"

Classic mistake:

• Market drops 30%, feels "cheap"
• Borrow money to buy more ETFs
• Another 20% drop → margin call, forced liquidation, larger losses

Lesson: in a crash, it can always drop further. Leveraged investing during a crash is devastating.

4. Checking your account constantly

Classic mistake:

• Refresh to see how much it dropped today
• Emotions hijacked
• Poor sleep, work mistakes

Lesson: for long-term investing, check less. Monthly or quarterly is enough.

What to actually do during a crash

1. Do nothing

The most underrated advice: do nothing.

• Your original allocation (stock/bond split) continues to run as planned
• You're in accumulation — a drop means "buy at a discount"
• Long-term holding far outperforms market timing

2. Keep DCA'ing

Classic correct behavior:

• Keep auto-debiting into ETFs monthly
• The lower the market, the more units the same dollar buys
• Average cost comes down

3. Rebalance

If your target is 60% stocks / 40% bonds:

• After the crash it drifts to 50% / 50%
• Sell some bonds, buy stocks to restore the ratio
• This is "buy low, sell high" on autopilot

4. Check your emergency fund

Crashes often coincide with economic recessions and rising unemployment risk. Make sure:

• 6 months of expenses in cash
• Insurance is in place (medical, accident, life)
• You aren't forced to sell stocks at the lows for cash

See the Emergency Fund Calculator.

Special considerations for retirees

If you're already retired and drawing from your assets:

Sequence of returns risk

Retiring right into a crash + withdrawing at the same time = double whammy. Solutions:

1. Temporarily reduce withdrawals (in bad market years)
2. Spend down cash holdings (keep 2–3 years of cash to cover drawdowns)
3. Withdraw from bonds (instead of selling the most-depressed stocks)
4. Part-time income (reduce what you pull from assets)

See Monte Carlo Retirement Simulation for deeper discussion.

Mental preparation

The market's long-term uptrend requires "you have to survive."

Be ready for 40% paper losses

Historically, a drawdown over 30% occurs at least once per decade. Your portfolio must be able to withstand:

• 100% stocks: max drawdown possibly 50–60%
• 60/40 stock/bond: max drawdown about 30–35%
• 40/60 stock/bond: max drawdown about 20%

Pick an allocation your psychology can handle, not the "mathematically optimal" one.

Write down your plan and put it away

Many investors recommend writing down an Investment Policy Statement:

• My goal: X (e.g., retire at 55)
• My strategy: 70% stocks / 30% bonds, globally diversified
• My response: when the market drops more than 20%, keep DCA'ing and do not sell stocks

Pull it out during a crash to remind yourself of your rational past self.

Crash rules for beginners

1. Don't sell — this is the most important
2. Don't look — monthly/quarterly is enough
3. Don't change — stick with the original plan
4. Rebalance — small adjustments back to target
5. Keep DCA'ing — don't stop; when salary arrives, invest

People who do these five things make money over the long run, almost without exception.

Closing thoughts

Market ups and downs are normal. Over the past 100 years, the US market has spent about 1/3 of the time falling. But overall it trends up.

The real question isn't "will a crash come" (it definitely will), but "will you do something dumb during the crash."

Get your mindset right, write down your plan, set your discipline — and a crash becomes your most profitable moment (because you didn't sell at the lows and you even bought cheap).

Tools

• Monte Carlo Simulation: see your portfolio's success rate under different scenarios
• Asset Allocation Calculator: find your target allocation
• Emergency Fund Calculator: prepare the buffer for down periods

Disclaimer

This article is a general discussion of mindset during market volatility and does not constitute specific investment advice. Past performance does not guarantee future results. Actual investment decisions should be based on your personal situation.