How Financial Advisors Manage Market Downturns
What disciplined advisors actually do when markets fall — and why “stay the course” is more active than it sounds
First, a Reframe
When clients ask how Elmwood Wealth handles market downturns, they often expect an answer about defensive positioning or moving to cash. The honest answer is more nuanced: our most important job during a downturn is usually to prevent clients from making a mistake — and our second most important job is to find the opportunities the downturn creates.
That might sound simple. It isn’t. The behavioral pull toward action during market stress is powerful, and it’s destroyed more long-term wealth than any single bear market.
Why Market Downturns Are Both Normal and Uncomfortable
Since 1928, the S&P 500 has experienced a correction of 10% or more roughly once every 1–2 years on average. Bear markets — declines of 20% or more — have occurred about every 3–4 years. Despite this, the long-term trajectory has been consistently upward.
The difficulty isn’t intellectual. Most investors understand that markets recover. The difficulty is emotional: watching a portfolio decline feels like permanent loss, even when history suggests otherwise. This is where Elmwood Wealth’s role as a behavioral anchor matters most.
“The investors who fare worst in downturns aren’t usually the ones with bad portfolios. They’re the ones who made one well-timed exit and then couldn’t figure out when to get back in.”
What Elmwood Wealth Does During a Downturn
Tax-loss harvesting. Declining markets create the opportunity to realize losses that can offset future capital gains. Elmwood Wealth proactively reviews client portfolios during periods of significant volatility to identify harvesting opportunities — turning paper losses into durable tax assets.
Rebalancing toward target allocation. When equity markets fall sharply, a portfolio’s allocation drifts below its equity target. Systematic rebalancing — buying equities when they’re down — is one of the few genuine “buy low” mechanisms available to long-term investors.
Identifying dislocated opportunities. Broad market selloffs often create pricing anomalies: high-quality companies trading at a discount to intrinsic value. We actively look for these situations as part of our equity research process.
Downside-protected structures. For clients closer to retirement or with lower risk tolerance, we evaluate ETFs and structured strategies with built-in downside buffers as a way to maintain equity participation with reduced tail risk.
Proactive client communication. Our most important job during volatile markets is staying in contact. We reach out to clients proactively — not reactively — to provide context, review plans, and make sure decisions are being made from a position of clarity rather than anxiety.
What We Don’t Do
Elmwood Wealth does not attempt to time the market by moving to cash during downturns. We don’t make dramatic allocation shifts based on macroeconomic forecasts. And we don’t treat each client’s portfolio in isolation from their tax situation and financial plan. These may sound like non-events, but they represent real discipline in an industry where reactive advice is common.
The Long-Term Picture
Every significant geopolitical event, recession, and financial crisis in modern history has eventually been absorbed by equity markets. That doesn’t mean any individual downturn is painless or that recovery is guaranteed on any specific timeline. It means that the structure of a well-built portfolio — one designed around your actual goals and timeline — should be resilient enough to stay intact through periods of volatility without requiring major intervention.
Frequently Asked Questions
What should I do with my investments during a market downturn?
In most cases, the right answer is: don’t make dramatic changes. The investors who fare worst in downturns are typically those who sell during the decline and struggle to determine when to re-enter. A well-constructed portfolio, aligned to your actual timeline and goals, should be designed to withstand volatility without requiring major intervention. If yours isn’t, that’s a planning problem worth addressing before the next downturn — not during one.
How do financial advisors protect against market losses?
No advisor can eliminate market losses — that’s an important thing to understand. What a good advisor can do is manage risk through diversification and rebalancing, reduce tax drag through strategies like tax-loss harvesting, identify opportunistic investments during dislocations, and — perhaps most importantly — keep you from making emotionally driven decisions that lock in losses or miss recoveries.
Is it a good time to invest when the market is volatile?
Historically, periods of elevated volatility have often been reasonable entry points for long-term investors. That doesn’t mean every downturn is a buying opportunity, and timing the exact bottom is not a realistic goal. What matters more is whether you’re systematically investing in a way that takes advantage of lower prices — through rebalancing, dollar-cost averaging, or identifying specific dislocated positions — rather than waiting on the sidelines for certainty that rarely arrives.
How often do stock markets recover after a downturn?
Every bear market in U.S. equity history has eventually been followed by a recovery to new highs. That’s not a guarantee about the future, but it is the historical record across more than 90 years of data — including the Great Depression, multiple recessions, the 2008 financial crisis, and the COVID-19 crash. The variable is time horizon: recoveries have ranged from months to several years, which is why the length of your investment horizon matters significantly.
If you’re currently navigating market uncertainty and want to talk through how your portfolio is positioned, Elmwood Wealth is available for a portfolio review.
About Elmwood Wealth — Elmwood Wealth is a fee-only, fiduciary RIA in Berkeley, CA, providing disciplined investment management and financial planning for Bay Area professionals and executives.
This article is for educational purposes only. Past market performance does not guarantee future results. Consult a qualified advisor before making investment decisions.