Here’s What You Can Do Right Now to Nail the Next Market Downturn

To make sense of market ups and downs, you need to understand that market fluctuations are normal. Rather than panic, have a clear plan that includes an emergency fund, a well-diversified portfolio with a long-term approach, maxing out your retirement contributions, and working with an advisor. Top online brokers and robo-advisors can help individuals weather the next market downturn by providing tools and resources to assist them with their finances.

Build an Emergency Fund

An emergency fund is money you set aside to cover unexpected expenses if you end up experiencing financial shocks. Think of it as a safety net whenever you face disruptions in your life.

Everyone needs an emergency fund, whether you’re a student, parent, working professional, or a retired individual. It’s important to have money set aside so you don’t have trouble covering surprise costs when the market drops, and if one or more of the following applies to you:

• Job loss or drop in income
• Medical emergency
• Home repairs
• Family emergency
• Legal problems
• Natural disaster
• Accidents

Your emergency fund should be kept in a liquid account, such as a high-yield savings or money market account, preferably one that offers a competitive return.

Financial experts suggest saving at least three to six months’ worth of living expenses in your emergency fund. If you use it, don’t forget to replenish it.

Diversify Your Portfolio

You probably know the saying “Don’t put all your eggs in one basket.” Put simply, it means you risk losing everything if you concentrate all your efforts in one area. The same idea applies to your money and your financial portfolio.

Concentrating your portfolio in one or a few assets or sectors makes you more reliant on their performance, and limits any flexibility you may have to market changes. You’re also more likely to react emotionally to short-term market fluctuations to avoid missing out on long-term gains.

You can spread out your risk and protect your portfolio by diversifying. Here’s how it works:

• Invest in different asset classes: Any losses in one are offset by gains in others. You can choose from a wide list that includes (but isn’t limited to) stocks, bonds, mutual funds, cash and cash equivalents, exchange-traded funds (ETFs), real estate, real estate investment trusts (REITs), certificates of deposit (CDs), and commodities.
• Consider companies from a range of sectors: Different industries respond to market conditions differently. When one faces a downturn, another may experience growth and offset those losses.
• Go international: Invest in international companies as well as emerging markets and other developed economies. There are stocks, fixed income options, mutual funds, and other investment vehicles that give you access to international investments.
• Consider different maturity lengths: This generally applies to your fixed-income investments. If you’re comfortable with higher risk, you may want to consider adding long-term bonds that pay higher interest.

Rebalancing your portfolio is just as important as diversifying it. This involves adjusting your investment holdings to keep your risk level where you want it to be. You should do this at regular intervals—usually every six to 12 months. You also should rebalance when your goals change and as you get older. That’s because your risk tolerance changes as you age; you’re able to handle more risk when you’re younger, but have a lot less time to make up for market swings as you age.

Adopt a Long-term Perspective

Long-term investing helps you build wealth and achieve your financial goals. It takes discipline, especially under short-term market pressure. You may panic and be tempted to sell some of your investments or buy into the latest trend. If you hold on and ride the wave, you’re more likely to be rewarded because of your patience.

A major benefit of long-term investing is compounding returns. The money you invest earns interest and is added to your principal. In the next year, that balance earns interest and is added to the principal. This continues each year. Over time, your money grows faster because your principal and interest keep generating more money. If you pull your money out, you’d lose all that interest.

You also avoid potential tax implications by keeping a long-term approach. If you sell your assets and make a profit, you’ll trigger a capital gains tax liability. This may effectively reduce whatever profit you make.

Max Out Your Contributions

If your employer offers a 401(k) or 403(b), don’t pass it up. It’s a hassle-free way long-term investment approach that uses compounding to its advantage.

These retirement savings plans allow you to contribute pre-tax dollars using automatic payroll deductions. They reduce your gross taxable income and provide you with some tax savings when you file your annual return. Some employers also match your donations up to a certain percentage, so if you aren’t contributing, you’re giving away free money.

You also can contribute to traditional and Roth individual retirement accounts (IRAs). To contribute to a traditional IRA, you must have earned income during the tax year. A Roth IRA requires that your modified adjusted gross income (MAGI) meets a certain threshold based on your tax filing status:

Roth IRA Phase-out Ranges for 2025
Filing Status	2025 MAGI	Contribution Limit
Married and filing jointly (or qualifying widow(er))
	Less than $236,000	$7,000 ($8,000 if age 50 or older)
	$236,000 to $246,000	Begin to phase out
	$246,000 or more	Ineligible for direct Roth IRA
Married, filing separately (but you lived with your spouse at any time during the last year)
	Less than $10,000	Begin to phase out
	$10,000 or more	Ineligible for direct Roth IRA
You are single, head of household, or married, filing separately (and you didn’t live with your spouse at any time during the last year)
	Less than $150,000	$7,000 ($8,000 if age 50 or older)
	$150,000 to $165,000	Begin to phase out
	$165,000 or more	Ineligible for direct Roth IRA

In the 2025 tax year, you can contribute a maximum of:

• $23,500 to a 401(k) or 403(b) and an additional catch-up contribution of $7,500 for people 50 and older
• $7,000 to a traditional IRA and an additional catch-up contribution of $1,000 for people 50 and older

Work With a Financial Advisor or Robo-Advisor

Whether you’re a novice or a seasoned investor, getting help from a financial advisor or a robo-advisor can help keep you on track. Financial advisors give you a personalized experience, but typically charge higher fees for their human touch. Robo-advisors, on the other hand, are digital platforms that use algorithms to give you investment management services. Robo-advisors are cheaper, and they tend to be well-suited for new investors rather than those with more complex needs.

Your advisor may help you come up with a few different strategies you can use to maximize returns. Here are two ways you can do that:

• Dollar cost averaging (DCA): This strategy allows you to invest your money little by little over time rather than all at once. When you use dollar cost averaging, you can buy more shares at lower prices during a downturn. This increases your holdings and can improve your long-term returns when there’s a recovery.
• Tax-loss harvesting: Tax-loss harvesting works by turning tax losses into tax advantages. You can sell underperforming assets, reposition your portfolio, and use the losses to offset gains from other investments. You can deduct up to $3,000 in net losses from your total annual income. If your losses exceed that amount, you can carry any additional losses over into any following tax years.

The Bottom Line

It’s normal to feel nervous when bad news hits the markets, especially when you’re an investor. Take a step back and understand that the pendulum swings both ways and that knee-jerk reactions can do more damage than good. Follow the tips we’ve highlighted above by diversifying your portfolio and keeping a long-term perspective. And more importantly, don’t panic. Tune out the noise, review your plans, and keep investing. If all else fails, consult a financial professional who can help guide you in the right direction.