Key Points
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During a downturn, high-quality businesses should hold up better than unprofitable growth stocks that depend on outside funding.
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It’s easy to start panicking, which often encourages selling positions at the worst possible times.
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The best investors stay the course and keep adding money, turning a market crash into a valuable opportunity.
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There isn’t one strict way to define a stock market crash, but it happens when equities tank suddenly without warning. When living through them, it can feel like the world is ending. This feeling is exacerbated by investor panic or an economic shock.
The most recent started in February 2025, when President Donald Trump introduced sweeping tariffs on Chinese goods. Before that, the onset of the COVID-19 pandemic in February and March of 2020 rattled markets. They’re not common. But when they do take place, they surprise investors. And sentiment takes a massive hit.
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What happens to your portfolio during a stock market crash? Investors need to look at both the positive and negative aspects to be fully prepared if such a scenario arises.
Equity prices will fall
It’s no shock that during a crash, many of the stocks that you own will lose value. This could be a short-term phenomenon. However, it might also take a while for certain positions to fully recover.
Not all stocks will behave similarly. It all depends on the kinds of companies you have in your portfolio.
High-quality businesses should generally hold up better. Companies like this generate steady revenue that doesn’t fluctuate too much with broader macroeconomic trends, as customers should still need their products and services regardless of the backdrop. Their profits and free cash flows are robust. And their balance sheets are in solid shape.
This doesn’t mean that their share prices won’t fall. They could still drop with the overall market, or with the sector that’s getting hit hardest. However, these companies should still have relatively strong underlying fundamentals.
Unprofitable growth stocks are a different story. They typically need access to outside funding to keep operating. During a market or economic downturn, that funding can quickly dry up. As a result, these businesses face heightened uncertainty. And investors will become extremely pessimistic about their prospects.
These kinds of stocks are usually valued based on price-to-sales ratios. Shareholders should expect their valuation multiples to collapse.
You also have to think about market sentiment in this bleak environment. Negative headlines get all the attention. This can trigger a spiraling feedback loop. Falling stock prices can push even the most level-headed investors into a panic, leading to mistakes. And they might sell their stocks at the worst possible time in an effort to stop the pain, adding further downward pressure.
Downturns can present opportunities
Market crashes also come with some good news. The best investors know this is true. And they stay the course.
History shows that the market always recovers. The S&P 500 index has produced a positive total return in 94% of rolling 10-year periods since the 1930s. That stellar track record speaks for itself. And it suggests that crashes are blips on the radar if you zoom out.
Investing early and often and spending time in the market is profoundly more impactful than trying to actively jump in and out of positions. This trading mentality requires successfully figuring out when exactly to sell and when to buy back in again. That’s a losing game that should be avoided.
Another positive development is that crashes present discount opportunities, as investors send both good and struggling stocks lower. Investors who adopt a dollar-cost-averaging approach — consistently adding money to their portfolios each month regardless of broader market swings — will see those allocations go further, enabling the purchase of securities at attractive valuations and introducing upside when equities bounce back.
“Be fearful when others are greedy, and be greedy when others are fearful,” Warren Buffett wrote in an opinion piece in The New York Times during the financial crisis in 2008. To actually put these words into practice requires preparation. Besides being mentally and emotionally ready, investors have to have the cash on hand to play offense. This can turn crashes into opportunities.
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Neil Patel has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
