Stock Market Crashes Can Change Your Life for the Better

On 2 April 2025, US President Donald Trump announced sweeping tariffs from the White House Rose Garden. Within four trading days, the S&P 500 fell roughly 12%. Global markets shed trillions in value. If you held shares, a KiwiSaver Scheme in a growth fund, or a managed investment portfolio, you felt it.

If you are wondering whether to sell, hold, or invest more during a stock market crash, the historical evidence points overwhelmingly in one direction: stay invested, keep contributing, and treat lower prices as an opportunity rather than a threat.

By late June 2025, the S&P 500 had recovered every cent of the loss and was setting new all-time highs. The investors who panicked and sold locked in real losses. Those who held their nerve, or invested more at lower prices, came out well ahead.

It is a pattern as old as markets themselves. This article explores why a stock market crash, while undeniably unpleasant, can be one of the most useful things to happen to your financial life.

What Counts as a Stock Market Crash?

A stock market crash is generally defined as a rapid decline of 10% or more in a major index over days rather than months. Crashes are driven by panic selling: one wave of fear triggers the next, and prices fall faster than any rational assessment of value would justify.

Since 1950, the S&P 500 has experienced roughly 13 declines of 20% or more. The average drop has been about 33%, lasting around 11 months from peak to trough. The average recovery has taken just over two years. But these averages mask enormous variation. The Covid crash of March 2020 recovered within six months. The post-1929 crash took 25 years.

Most New Zealand investors hold globally diversified portfolios through KiwiSaver Schemes and managed funds, so S&P 500 data is directly relevant. When Wall Street falls sharply, NZ-based portfolios feel it in near real-time.

For New Zealand readers, the 1987 crash still looms large. On 20 October 1987, the New Zealand sharemarket lost $5.7 billion in a single session. Unlike Wall Street, which recovered within about two years, the NZX languished for over a decade. It fuelled a generation-long Kiwi distrust of financial markets and a cultural preference for property investment, consequences still visible today.

Crashes are a normal feature of investing. What distinguishes successful investors from everyone else is how they respond when one arrives.

Your Brain Is the Biggest Risk in a Crash

The field of behavioural finance has spent decades studying why intelligent people make terrible decisions during market downturns. The core finding is brutally simple: our brains are wired to treat financial losses as threats to survival.

Loss Aversion: Why Losses Sting Twice as Much

Research by Daniel Kahneman and Amos Tversky established a phenomenon called loss aversion: the pain of losing money is felt roughly twice as intensely as the pleasure of gaining the same amount. When your portfolio drops $10,000, the emotional response is about as powerful as the joy you would feel from a $20,000 gain. This asymmetry pushes us toward panic selling at precisely the wrong moment.

A 2025 study published in PLOS ONE, analysing individual investor data from Japan, confirmed the pattern. Financially literate investors were significantly less likely to panic sell during a crisis. But here is the twist: investors who were overconfident in their own knowledge were more likely to panic sell, regardless of actual literacy. Knowing a little about markets can be more dangerous than knowing nothing at all, if it comes with overconfidence.

Why Checking Your Portfolio Makes It Worse

The most practical defence against loss aversion is embarrassingly simple: stop checking your investments during a downturn.

Experimental research has shown investors who check their portfolios less frequently make better decisions and earn higher returns. The more often you look, the more short-term losses you see, and the more likely you are to react emotionally. In a market moving sideways or upward over decades, daily checking creates a constant stream of negative signals, because on any given day or week there is roughly a coin-flip chance of being down.

A crash exposes your real relationship with risk, not the version you imagined during calmer times. The practical takeaway is clear: know the bias exists, and build habits to protect yourself from it.

Buying When It Hurts

If there is a single idea worth taking from this article, it is this: the best time to invest is often when it feels the worst.

When prices fall, every dollar you invest buys more. If you hold a KiwiSaver Scheme in a growth fund, for instance, your regular contributions during a downturn purchase more units at lower prices. When markets recover, you benefit from the rebound on a larger base. This effect, often called dollar-cost averaging, works quietly in the background of every regular contribution you make.

The April 2025 tariff crash illustrated this vividly. Retail investors who bought into Vanguard exchange-traded funds during the sell-off contributed a record US$21 billion in a single month, the highest monthly inflow in the fund’s 15-year history. These buyers were not market geniuses. They were following an old principle: when quality assets go on sale, you buy more.

For New Zealand investors, the same logic applies through locally managed funds and KiwiSaver Schemes. Most Kiwi portfolios are invested globally, meaning sharp falls in overseas markets flow through to your balance. But so do the recoveries. If your time horizon is measured in decades rather than months, lower entry prices today translate directly into higher compound returns over time.

Morningstar’s analysis of 150 years of US stock market data found the market recovered from every major decline, including a 79% crash in the early 1930s. An initial investment of US$100 in 1870 would be worth over US$3.5 million today, having survived two world wars, a Great Depression, the stagflation of the 1970s, the dot-com bust, the global financial crisis, a pandemic, and the tariff turmoil of 2025.

A Crash Clarifies What Actually Matters

When markets are rising, most people do not think too carefully about what their money is for. A crash changes this. Suddenly, the question of why you are investing becomes urgent.

Are you saving for financial freedom in retirement? Building a deposit on a first home? Funding your children’s future? Or have you never really defined the purpose at all?

If you have not set clear financial goals, a market downturn is the best time to do it. Goals act as an anchor. When share prices drop 15% and the headlines turn grim, a well-defined objective gives you a reason to stay invested rather than sell.

Short-Term vs Long-Term Goals

The distinction matters. Money you need within the next one to three years should generally not be exposed to share market volatility, regardless of market conditions. Money you will not need for a decade or more is a different proposition entirely. Understanding where each dollar sits on this spectrum is fundamental to making sound decisions during a crash, and outside of one.

Discovering Your Real Risk Tolerance

Most people think they can handle investment risk until the losses become real. How would you feel if your portfolio dropped $10,000 in a day? What about $50,000? Or $100,000?

Your true risk tolerance is only revealed when actual money is on the line. A crash is an honest, if uncomfortable, way to find out. Plenty of investors who describe themselves as “growth” investors discover during a downturn they are anything but.

This is not a failing. It is useful information. If a 20% decline causes you genuine distress, your portfolio is probably not aligned with your temperament. Better to know this and adjust, perhaps shifting toward a more balanced mix of shares and bonds, than to make a panicked decision mid-crash and lock in losses.

Ideally, you would stress-test your portfolio against various scenarios during the good times, well ahead of any turmoil. If you are unsure where you stand, an FMA-regulated financial adviser can help you work through this properly. At Become Wealth, we do this as part of our standard process: building portfolios around your real tolerance, not just your aspirations.

Diversification: The Lesson Crashes Teach Twice

If you had all your money in a single company or a single sector when the market fell, a crash taught you the hard way about diversification. By spreading investments across different asset classes, including shares, bonds, property, and cash, you reduce the damage when any one area takes a hit.

The five major asset classes available to most investors are equities (shares), bonds (fixed interest), real estate (property), commodities (including gold), and cash. Each behaves differently in different market conditions. A well-diversified portfolio will not avoid losses entirely, but it will soften them considerably.

Managed funds and exchange-traded funds (ETFs) offer a straightforward way to achieve diversification without needing to select individual investments. Listed property funds provide exposure to real estate without the complexity of buying physical property.

In New Zealand, direct property investment remains popular for good reason: property tends to appreciate over time, lending is simpler compared with other asset classes, and there is no broad capital gains tax. But concentration in a single asset class, however familiar, is still concentration.

Building Better Financial Habits Under Pressure

Crashes have a way of sharpening your attention. When the market drops, people who never looked at their spending start tracking it. People who avoided budgeting suddenly see the point. This heightened awareness, while triggered by anxiety, can produce lasting improvements.

If you have not already, build a simple budget covering your income and essential expenses. The goal is not deprivation. It is clarity: knowing exactly where your money goes so you can redirect more of it toward building wealth.

An emergency fund covering three to six months of living expenses is one of the most valuable financial assets you can hold, especially during a downturn. It means you will not be forced to sell investments at a loss to cover an unexpected bill. It also buys you the psychological space to make calm decisions when everyone around you is doing the opposite.

Diversifying Your Income, Not Just Your Portfolio

A market crash is also a reminder of how exposed most people are to a single source of income. If the economic disruption costs you your job, and your investments are down at the same time, you face a double hit.

Building a secondary income stream, whether from consulting, freelancing, or turning a skill into a side business, reduces your dependence on a single employer. It also gives you additional capital to invest when prices are low, which is when the highest long-term returns are available.

You do not need to start the next global enterprise. Even a modest secondary income improves your resilience during the periods when resilience matters most.

Reassessing Your Approach

Once the immediate turbulence passes, a crash is an excellent moment to review your overall investment approach. Questions worth asking:

Am I contributing enough? A downturn is often a good prompt to review your KiwiSaver contribution rate or the amount flowing into your managed investment portfolio.

Is my fund choice still right? If you are decades from retirement and sitting in a conservative fund, you may be leaving significant long-term growth on the table.

Do I have too much cash? Some cash is essential (see emergency fund above). But holding excessive amounts in low-returning deposits while markets offer discounted prices is a missed opportunity.

Should I be paying off debt instead? Depending on your personal situation, redirecting contributions toward high-interest debt may deliver a better guaranteed return than any investment.

What Being Ready for the Next Crash Looks Like

The next crash is not a question of if, but when. History tells us corrections and bear markets arrive every few years, triggered by events nobody can predict: a pandemic, a policy shock, a financial crisis, a geopolitical escalation. The timing is unknowable. The occurrence is certain.

Being ready means having three things in place before the next one hits.

1. ‍First, clarity. Know what your money is for, what your time horizon is, and how much volatility you can genuinely stomach. These answers should be written down, not stored vaguely in your head where panic can rewrite them.‍
2. Second, structure. A diversified portfolio aligned to your goals and risk tolerance, an emergency fund covering several months of expenses, and a contribution plan you will stick to regardless of headlines.‍
3. Third, the right support. The investors who navigate downturns best are rarely acting alone. Working with a qualified, FMA-regulated financial adviser means your decisions are grounded in evidence and tailored to your situation, not driven by the news cycle.

If the last crash revealed gaps in any of these areas, now is the time to close them. Book a complimentary initial consultation with one of the team at Become Wealth. The market will test you again. When it does, you want to be the investor who sees opportunity, not the one scrambling to react.