3 Ways to Prepare for a Stock Market Downturn

After back-to-back years of 20%-plus gains for U.S. stocks,¹ unpredictable policy changes are making 2025 a much rockier ride. Here, a Schwab financial planner and two wealth advisors offer guidance for investors looking to make the most of an uncertain situation.

"Even in a bear market, you should be in good shape if your portfolio mix matches both your time horizon and risk tolerance," says Tracey Lehmer, CFP^®, CWS^®, a financial planner for Schwab Wealth Advisory. "If you have many years of saving ahead of you, you can probably afford to take on more risk—and the potential losses that come with it—in exchange for the potential growth prospects.

"If you're nearing a major goal such as retirement, shifting to a moderate to conservative mix can typically help insulate your savings from a major market decline. This strategy could be especially apt if the stock market gains of the past couple of years have left you better positioned to meet your retirement or legacy-giving goals.

"Whatever your situation, your portfolio balance could be overweighted to stocks as a result of the market's strong run, so review your holdings regularly to help keep your risk exposure in check."

"You can manage your risk exposure while maintaining your asset allocation by taking a slightly more defensive stance with your investments within each asset class," says Randall Sims, CFA^®, CPWA^®, a senior wealth advisor for Schwab Wealth Advisory. "For example, mature dividend-paying companies, particularly those that regularly increase their payouts, generally have strong financials and often fare well during periods of market volatility.

"You might also consider stocks in developed (as opposed to emerging) foreign markets, which often pay higher dividends and have lower valuations than U.S. stocks.

"Yet another way to play defense is with stocks in sectors such as consumer staples, health care, and utilities, since consumers rely on these industries regardless of how the economy is performing."

"Some investors actually welcome a downturn because it allows them to buy more shares for the same amount of money—which is a great mindset to have, so long as you don't try to time the market," says Eron Dahl, CFP^®, CWS^®, CPWA^®, director and senior wealth advisor for Schwab Wealth Advisory. "Indeed, Schwab's own research has shown, again and again, that the 'perfect' time to invest is as soon as you have the money, because it's nearly impossible to predict when the market will hit bottom, even among professional stock pickers."