Rebalancing in a crash: what your plan should say (and what not)

In a crash, your brain screams “do something!” Rebalancing is one of the few “somethings” that can actually be sensible — but only if it’s a pre-written rule, not an emotional decision. This article gives you a simple “crash clause” you can copy into your investment plan.

First: what rebalancing is (and isn’t)

• Rebalancing is: bringing your portfolio back toward your target weights (e.g., 80/20 stocks/bonds).
• Rebalancing is not: trying to guess the bottom, forecasting recessions, or switching to “safer” assets because the headlines feel scary.

The “crash clause” your plan should include

Write this down before the next crash. Keep it short enough that you’ll follow it when stressed.

1) What counts as a crash (definition)

Optional, but helpful to avoid overreacting to normal volatility.

• Definition: “A crash is a broad equity drawdown of about 20%+ from recent highs, or when my stock allocation is outside my rebalancing bands.”

2) The only actions I’m allowed to take

• I keep contributing if my income is stable.
• I direct new contributions to the underweight asset first (often fixes drift without selling).
• I rebalance only if bands are broken (example: any asset class is off target by ±5 percentage points or more).
• I rebalance back to target (not “halfway”, not “a bit less risky”).

3) The safety override (when I do less)

Crashes often come with real-life stress. Give yourself permission to simplify.

• If I have job/income risk, I pause extra investing and focus on cash needs (emergency fund first).
• If trading costs/taxes are unusually high, I rebalance gradually using contributions or smaller trades.
• If markets are closed/illiquid or spreads are abnormal, I wait and re-check later (I don’t place rushed market orders).

4) How often I check (so I don’t spiral)

• During a crash: I check allocations at most once per month.
• Outside crashes: quarterly checks are enough for most long-term ETF investors.

5) What I will not do (important!)

• I will not “go to cash” because it feels safer.
• I will not change my target allocation in the middle of a crash.
• I will not add leverage, options, or “revenge trades”.
• I will not sell my bond allocation just because bonds are boring.
• I will not look for a perfect entry point before investing again.

A simple example (80/20 portfolio)

Target: 80% global stock ETF, 20% bond ETF. Bands: ±5 percentage points.

• If stocks fall and drift to 73/27, I rebalance back to 80/20 (using contributions first; sell only if needed).
• If stocks drift to 76/24, I do nothing.

Key takeaways

• The best “crash behavior” is a pre-written rule, not courage.
• Check on a schedule. Act only if bands are broken.
• Real-life cash needs come first — your plan should say that, too.

Not investment advice. This is a behavioral checklist for long-term ETF investors. If you need a tailored plan (taxes, product selection, risk constraints), talk to a regulated professional.