Imagine 40 per cent of your life savings vanishing into thin air.
If you invest in the stock market long enough, it’s probably going to happen at some point. Perhaps sooner than you’re prepared for.
To many everyday investors, it seems like 2026 has been preordained as the year the stock market buckles under its own weight. They’re told stock valuations are out of control, an artificial-intelligence bubble is destined to pop and the days of double-digit returns are coming to an end.
The risk with all that doomsaying is it can spook regular investors out of the stock market prematurely.
Best to brace oneself well in advance. Think of it like a financial fire drill. When smoke is billowing in your face is no time for snap decisions that could impair your financial future.
Crashes are inevitable, even normal. Sell-offs of at least 30 per cent occur once every 10 years or so, on average. That goes for the TSX and the S&P 500 Index alike.
Drops of 40 per cent only happen every few decades. Rarer still is when the stock market declines by half, although there were two such episodes in the 2000s, which were bookended by the popping of the dot-com bubble and the 2008 global financial crisis.
But guess what? Investors who didn’t panic and kept up with regular contributions to their portfolios would have made money, even through the worst decade in stock market history.
Which brings us to the first rule of surviving a market crash.
Use dollar-cost averaging
This is just a fancy way to describe putting a fixed amount of money into a portfolio at regular intervals. But it can work wonders.
Consider an investor who had a $100,000 stock portfolio just as the stock market peaked in 2007. As chaos engulfed the financial world, ultimately dragging North American stock indexes down by 50 per cent or more, our investor sank $500 from his paycheque into the market, month after month.
Such a portfolio would have recovered more than a year quicker than the stock market did. By the time the S&P 500 got back to its precrisis peak more than four-and-a-half years later, our hypothetical investor would already have been up by about $10,000.
Stay invested
Humans are hard-wired to detest losing money. So when you see your trading account hemorrhaging money in real time, it triggers a visceral impulse to stanch the bleeding.
But those losses aren’t real. They only exist on paper. There is one way to make them permanent – by selling.
Only by resisting the urge to hit the panic button can you ensure that you will come out the other side in decent shape.
Treat it like a fire sale
The cost-of-living crisis has turned hordes of Canadians into deal hounds. But stocks seem to be treated as an exception. When the price goes down, people get scared to buy them.
Such moments, Warren Buffett wrote in late 2008 while the market was in free fall, let you “buy a slice of America’s future at a marked-down price.”
Instead, many investors sought the comforts of cash rather than subject themselves to the horrors of the financial markets.
“Equities will almost certainly outperform cash over the next decade, probably by a substantial degree,” Mr. Buffett said. The S&P 500 went on to triple in 10 years’ time.
Don’t lose your job
Easier said than done, of course. But the ability to invest opportunistically during a market meltdown is predicated on staying employed.
The fallout from a bear market can spread to the real economy in a few different ways. Household wealth declines, which leads to consumers cutting back on spending. Credit availability tightens, which drags down economic growth. And in Canada, these spillovers tend to be worsened by our trade integration with the United States.
A recent Scotiabank report estimated the economic impact from a U.S.-centred stock selloff. If the S&P 500 declined by 40 per cent, which could drag the TSX down by 20 per cent, then the job losses in Canada would likely number about 70,000.
Only investors who are spared from the layoffs will have the luxury of continuing to plow money into stocks at lower and lower prices.
Beware sequence-of-returns risk
Stock market crashes are especially scary for the retired, or those about to be. Once you are in drawdown mode and relying on your investment portfolio for income, you can ill afford the major hit of a market downturn.
For these investors, getting more defensive may be the smart move.
The same goes, however, for any investor who could not weather a 40-per-cent drawdown. Because sooner or later, it’s going to happen.
