Fidelity maps a survival plan for falling markets

Market selloffs have a way of turning confident investors into anxious ones, and the 2026 trading year is delivering plenty of reasons to feel uneasy. The S&P 500 is down roughly 4% year-to-date, weighed down by geopolitical tensions, sticky inflation, and fading optimism about rate cuts.

Fidelity Investments, which manages more than $5.8 trillion in assets, is urging you to resist the impulse to panic sell. The firm published an updated playbook with five specific moves to help everyday investors navigate volatile periods without abandoning their long-term financial plans.

The guidance covers everything from emergency savings to Roth conversions, and each step turns short-term market pain into a longer-term advantage. Here is what Fidelity recommends and how you can put each move to work for your household.

Your emergency fund is the first line of defense in a downturn

Fidelity’s first recommendation is often overlooked during bull markets: shore up your emergency fund before making any investment decisions. The firm advises starting with at least $1,000 in accessible savings, then building toward three to six months of essential expenses, Fidelity reports.

A January 2026 U.S. News survey of 1,216 adults found that 43% of Americans could not cover a $1,000 surprise expense from savings alone, U.S. News reports. The median emergency fund balance dropped to $5,000 from $10,000 the prior year.

"Retreating to cash only protects you from one risk further equity losses but it doesn't safeguard you against other key trouble spots specifically, inflation risk or the chance that you'll outlive your money because your portfolio didn't grow as much as it needed to" said Director of Personal Finance and Retirement Planning Christine Benz.

If you are the sole income earner or your employment feels uncertain, Fidelity recommends targeting the higher end of that range.

Keep your emergency cash in a high-yield savings account or money market fund, where it earns interest while staying liquid. Automating monthly transfers, even $50 or $100 at a time, builds the habit and the balance steadily.

Dollar-cost averaging removes emotion from your investment decisions

Volatile markets tempt investors to pause contributions or sell at the worst possible time, and Fidelity’s second recommendation addresses that behavioral trap directly. The firm advocates dollar-cost averaging, which means investing a fixed amount at regular intervals regardless of market direction.

Fidelity illustrates this with a simple example: investing $250 per month for a full year. In a declining market, that same $250 purchases more shares at lower prices, reducing your average cost over time.

The firm’s hypothetical shows a down-market investor accumulating 102 shares at $29.39 each, while the up-market investor bought only 46 shares at $64.62.

The S&P 500 has delivered a total return of 277% over the past decade despite bear markets in 2020 and 2022, according to market data. Staying invested through those drops was what made that gain possible, and automating contributions through your 401(k) or IRA is the simplest way to stay the course.

Rebalancing your portfolio keeps your risk level where you intended it

The S&P 500 started 2026 about 85% higher than it was five years earlier, Fidelity notes. That kind of prolonged rally can quietly shift your portfolio’s asset allocation well beyond your original targets. A portfolio that began as 50% bonds, 35% U.S. stocks, and 15% international stocks may now lean heavily toward domestic equities.

That drift means you could be carrying far more risk than you originally signed up for without realizing it. Fidelity uses the example of a portfolio that now shows 45% U.S. stocks, 25% foreign stocks, and only 30% bonds. The resulting mix reflects a much higher risk tolerance than you may have selected when you first built your plan.

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Rebalancing means selling positions that have grown too large and redirecting that money into areas that have fallen behind. This can feel counterintuitive because you are trimming your winners, but it is one of the most disciplined steps you can take.

Rebalancing helps you stay diversified and avoids overexposure to a single asset class right before a potential correction. Most brokerage platforms offer automatic rebalancing tools that handle this on a quarterly or annual basis without any effort on your part.

If you prefer to do it manually, review your allocation at least twice per year to keep your portfolio aligned with your goals. Financial advisors generally recommend rebalancing whenever any asset class drifts more than five percentage points from your target.

Tax-loss harvesting turns paper losses into real tax savings

Fidelity’s fourth recommendation targets a strategy many retail investors overlook: selling investments that have declined to offset realized capital gains elsewhere in your portfolio. If your realized losses exceed your gains, you can deduct up to $3,000 in ordinary income annually under current IRS rules, according to Fidelity’s guidance notes.

Key rules to keep in mind

• The IRS wash sale rule disallows the loss if you repurchase the same or a substantially identical security within 30 days before or after the sale, according to IRS Section 1091.
• The rule applies across all of your accounts, including IRAs, spousal accounts, and brokerage accounts at different firms.
• Automatic dividend reinvestment plans can accidentally trigger a wash sale if dividends are reinvested within the 30-day window.
• One alternative is to sell the losing position and purchase an ETF in the same sector rather than rebuying the identical stock.

Fidelity’s hypothetical shows how a $5,000 long-term gain taxed at 23.8% creates a $1,119 tax bill, but offsetting it with a $4,000 realized loss reduces the bill to just $238. If you already have an investment manager, they may be handling this, but it is worth confirming with them directly.

A market dip could make your Roth conversion cheaper

Fidelity’s final recommendation requires careful timing and a conversation with your tax advisor. When your traditional IRA or 401(k) balance drops, converting to a Roth IRA means paying income taxes on a lower total value, buying into tax-free future growth at a discounted entry point.

Important considerations before converting

• Qualified Roth withdrawals in retirement are completely tax-free, provided you meet the five-year aging requirement and are at least 59½.
• Roth IRAs do not require minimum distributions during your lifetime, giving investments more time to compound without forced withdrawals.
• Converting too much in a single year could push you into a higher tax bracket, so splitting across multiple years may be smarter.
• Pay the conversion tax bill from outside funds, not from the converted amount itself, to maximize growth inside the Roth.

"For a distribution to be considered qualified, the 5-year aging requirement has to be satisfied, and you must be age 59½ or older or meet one of several exemptions," Fidelity states. This strategy is not for everyone, particularly if you expect a lower tax rate in retirement or need the funds within five years.

The real risk is abandoning your financial plan during turbulence

Fidelity’s message is that volatility is normal and manageable when you have a plan. The S&P 500 experienced double-digit declines in 2018, 2020, 2022, and 2025, yet it recovered every time and still delivered a compound annual return of 14.2% over the past decade.

Missing just the 10 best trading days over a ten-year period can cut your total returns roughly in half, according to Fidelity's analysis of Bloomberg data. Those best days almost always occur during the most volatile stretches, meaning investors who sold out of fear also missed the sharpest rebounds.

Practical next steps you can take this week

A few practical steps can help you navigate market swings with confidence.

Your action checklist for a volatile market

• Review your emergency savings and set up an automatic monthly transfer to close any gap between your current balance and three to six months of expenses.
• Log in to your 401(k) or IRA and confirm that automatic contributions are active; increase them by 1% if your budget allows.
• Pull up your current asset allocation and compare it to your target; rebalance if any category has drifted more than five percentage points.
• Check your taxable brokerage account for unrealized losses that could offset 2026 gains and consult a tax professional before executing trades.
• If you are considering a Roth conversion, schedule a meeting with your financial advisor to model the tax impact before markets recover.

Each of these steps takes less than an hour, and together they position your finances to benefit from the recovery that has followed every market downturn in modern history.

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