A bear market is when the value of investments, like stocks, drops by 20% or more from recent highs. These periods are stressful and can hurt your portfolio, but reacting emotionally or aggressively might make things worse.
In this guide, we’ll explore eight smart strategies and mindsets to help you stay calm, protect your investments, and even find opportunities during tough market conditions.
Key Points to Remember
No one likes being in a bear market, but if you’re already in one, there are smart steps you can take.
You can take a cautious approach by slowly adding to your investment when prices fall, picking up quality stocks at a discount.
Or you can take an active stance by betting on market declines, which can help you earn profits while others are losing.
1. Don’t Let Fear Take Over
There’s a well-known saying on Wall Street: “The Dow climbs a wall of worry.” This means the stock market has a history of rising over time, even during scary global events like recessions or political instability.
It’s important to separate emotions from decisions when investing. What feels like a huge crisis today may be a distant memory a few years from now.
Fear often clouds your judgment and pushes you to make poor choices. The best approach is to stay calm and stick to your plan—panic-selling rarely ends well.
2. Use Dollar-Cost Averaging (DCA) to Build Your Portfolio
Stock markets go through ups and downs—it’s a natural part of the economic cycle. For long-term investors (those with a 10-year or longer horizon), dollar-cost averaging is a smart strategy.
With DCA, you regularly invest a fixed amount of money, no matter what the market is doing. When prices drop, your money buys more shares; when prices rise, it buys fewer.
Over time, this evens out the cost of your investments and helps you build wealth at a lower average price. It’s a steady way to invest during uncertain times.
3. Play It Safe – “Play Dead”
In a bear market, the safest thing to do might be to “play dead”—a term used both in nature and investing. Just like you wouldn’t fight a wild bear in the forest, trying to fight the market could be risky.
In financial terms, playing dead means reducing risky investments and putting more of your money into safer places like certificates of deposit (CDs), U.S.
Treasury bills, or other short-term, liquid assets. These help protect your money without exposing you to major losses, allowing you to wait for better days.
4. Diversify Your Investments
Putting all your money into one type of investment is dangerous—especially in a bear market. A smarter move is to spread your money across different types of assets like stocks, bonds, cash, and alternative investments.
This is called diversification, and it helps reduce risk. If one asset falls in value, others might hold steady or even rise.
Your mix of investments should depend on your age, financial goals, risk tolerance, and investment timeline. A well-balanced portfolio is key to weathering tough markets.
5. Only Invest Money You Can Afford to Lose
Investing is important for building long-term wealth, but it shouldn’t come at the cost of your everyday needs. Don’t invest money that you need for essentials like food, rent, or emergency expenses.
As a rule of thumb, only invest money that you won’t need for at least five years. Bear markets can be brutal and can wipe out short-term profits. If your money is tied up in the market when you need it urgently, you might be forced to sell at a loss.
6. Look for Bargains – Focus on Value Stocks
Bear markets can actually be a great time to find high-quality stocks at discounted prices. The key is knowing what to look for. Some stocks drop simply because the overall market is falling—not because the company is doing badly.
Legendary investor Warren Buffett sees bear markets as buying opportunities. He looks for strong companies that are undervalued, and buys more when others are scared.
If you can identify good businesses that are temporarily down, you can build a solid investment for the future at a lower price.
7. Focus on Defensive Stocks
Defensive stocks are shares of companies that tend to perform better during economic downturns. These companies usually offer products or services that people need no matter what—like food, toiletries, and cleaning products.
Even when the economy is struggling, people still buy toothpaste, soap, and groceries. That’s why companies in sectors like healthcare, utilities, and consumer staples are called defensive industries. They’re often less volatile and may continue to provide dividends and stable earnings in bear markets.
8. Profit from Declining Prices – Go Short
While most investors aim to profit when stocks go up, it’s also possible to make money when prices go down.
Short selling is one way to do this. It involves borrowing shares, selling them at current prices, and hoping to buy them back later at a lower price. But be careful—if the market moves up instead, you could face big losses.
A safer alternative is using put options, which give you the right to sell a stock at a specific price. These can help limit your losses.
Another method is investing in inverse exchange-traded funds (ETFs), which are designed to move in the opposite direction of major market indexes. These are easier to trade than short-selling and can be done through regular brokerage accounts.
Why Keep Investing During Bear Markets?
Even though bear markets can be scary, history shows that the market eventually recovers—and goes on to reach new highs.
If you stay invested and keep buying during downturns, you can pick up strong stocks at cheaper prices. This long-term approach allows you to grow your investments when the market bounces back.
How Often Do Bear Markets Happen?
In the U.S., bear markets typically occur every 4.5 to 5 years. While they are painful, they are also a normal part of the market cycle.
Where Did the Term “Bear Market” Come From?
There are a few ideas about how the term “bear market” came to be. One theory is based on how animals attack—bulls attack by thrusting their horns upward, symbolizing rising markets, while bears swipe their paws downward, representing falling markets.
Another theory goes back to the old fur trading days, where bearskins were seen as a risky commodity. Traders would sell them even before catching a bear, hoping to buy them at lower prices later—similar to modern short-selling.
What Was the Worst Bear Market Ever?
The steepest and longest bear market so far was during the Great Depression, from 1929 to 1932. During this time, the stock market lost nearly 90% of its value, and it took many years to recover.
Final Thoughts
Bear markets are harsh and can come on quickly. They’re marked by long stretches of falling stock prices and can feel never-ending. But the truth is, they always end. The market eventually finds its bottom and starts climbing again as investors return.
Whatever strategy you choose during a bear market—whether it’s playing safe, diversifying, or finding hidden gems—remember this: don’t panic and sell at the bottom. Stay informed, stay disciplined, and your long-term investing plan will carry you through to better days.
By staying level-headed and following these smart investment strategies, you can turn a bear market into an opportunity rather than a disaster.
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