During times of market volatility, it's natural to question if we're in a bear market, and if so, how to handle it. But labeling bull or bear markets in the moment can be tricky. Often, these phases only become clear in hindsight after certain patterns emerge and play out.
A consistent investment strategy can offer you a more solid footing, bear market or not. To help you manage your investments more steadily, learn about the time-tested guidelines for how to invest during a down market.
What is a bear market?
A bear market is a period when prices of securities, such as stocks or bonds, fall by 20% or more from recent highs, typically signaling widespread investor pessimism. Here are the basics to keep in mind:
- On average, a bear market lasts about 1.2 years, though durations can range from a few months to several years, depending on the causes and broader economic conditions.
- Bear markets are a normal part of the market cycle and alternate with bull markets, which are marked by rising prices and optimism.
- A bear market can be triggered by factors such as economic recessions, rising interest rates, geopolitical tensions, or other events that shake investor confidence.
- During these downturns, investors often shift from riskier assets to safer ones like cash or government bonds, increasing selling pressure and driving prices lower.
While stressful, bear markets can also present opportunities for long-term investors to buy quality assets at discounted prices in anticipation of future recovery.
Understanding bear market cycles
Though the specific details can differ from one market cycle to another, bear markets usually go through these phases:
- Market peak. This marks the end of a bull market and the beginning of a bear market. Prices have generally been rising, and investor sentiment is usually positive.
- Initial decline. The market experiences a significant drop, usually triggered by a specific event or negative news, catching investors off guard. In response, many people sell off investments to protect themselves.
- Panic and selling intensification. Investor fear and negative sentiment grow as the decline continues. Panic selling becomes more prevalent as investors rush to exit the market.
- Bottoming out. Eventually, the market reaches a point where prices stop falling and start to stabilize. It's challenging to predict the exact timing, but this stage is often accompanied by positive news about economic indicators.
- Recovery. In this phase, economic conditions show improvement, and investor sentiment shifts again. Prices begin to rise as investors become more optimistic about the market's prospects.
Guide to investing in a bear market
Investing during a bear market requires a strategic approach and long-term mindset, rather than reacting emotionally to market declines. You may want to work closely with your financial advisor to talk through all of your options.
As you review your portfolio, these nine tactics can help with investment decisions in a bear market:
1. Set clear investment goals
Define your investment objectives and time horizon. Determine whether you're seeking to gain long-term growth, generate income or preserve capital. Clear goals can help you make more informed investment decisions during a bear market.
2. Diversify your portfolio
Spread your investments across different asset classes, sectors and geographic regions.
3. Consider defensive sectors
Certain sectors, such as consumer staples, utilities and health care, are considered defensive because they tend to be less impacted by economic downturns. These sectors may offer more stability during a bear market. However, you'll need to thoroughly research the individual companies within these sectors to ensure they meet your investment criteria.
4. Invest in quality
Seek out high-quality investments with a history of weathering market downturns. These are companies with a track record of consistent earnings, strong brands and a history of shareholder-friendly practices. Quality investments are more likely to withstand the challenges of a bear market and have the potential for future growth.
5. Try dollar-cost averaging
Regularly investing the same amount of money, regardless of market conditions, is known as
6. Stay disciplined & avoid emotional decisions
It's essential to remain disciplined and avoid making impulsive investment decisions based on fear or panic. Stick to your investment strategy, and avoid trying to time the market.
7. Maintain cash reserves
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8. Maintain a long-term perspective
Bear markets are a normal part of the market cycle and are often followed by bull markets. It's essential to maintain a long-term perspective and avoid making impulsive decisions based on short-term market fluctuations.
9. Regularly review & rebalance your portfolio
Periodically review your portfolio to assess its performance and alignment with your investment goals.
Is investing in a bear market right for you?
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Pros of investing during a bear market
- Lower prices: Bear markets typically result in lower asset prices, which can allow you to purchase investments at a discount. Buying assets when they're undervalued can potentially lead to higher returns when the market eventually recovers.
- Long-term bargains: A bear market can allow you to buy quality assets that may have been overpriced during bull markets. By investing in fundamentally strong companies or assets with solid growth potential, you can position yourself for possible gains when market conditions improve.
- Dividend opportunities: Some companies may continue to pay dividends despite the market downturn. If you invest in
dividend-paying stocks , you can take advantage of potentially higher dividend yields when stock prices are low.
Cons of investing during a bear market
- Uncertain timing and continued declines: Bear markets can be unpredictable, and prices may continue to fall after an initial decline. Investing during a bear market carries the risk of further losses if market conditions worsen or the downturn lasts longer than expected.
- Emotional stress: Bear markets can be emotionally challenging. The continuous decline in prices and negative sentiment can lead to financial anxiety, fear and doubt. Emotional decision-making, such as panic selling or making impulsive investment choices, can harm investment returns.
- Portfolio volatility: Investing during a bear market means accepting a higher level of
portfolio volatility in the short term. Asset values may continue to fluctuate up and down, and it can take time for the market to recover. You often need to keep a long-term perspective and be prepared for potential further declines before the market turns around.
What should you invest in when the market is down?
When markets decline, investors often look for stability, income or opportunities to buy quality assets at a discount. Choosing the best investments during a bear market depends on your risk tolerance and financial goals. Some investors focus on preserving capital, while others aim to position for long-term gains once the market recovers.
These are some common investment types that tend to hold up better, or even thrive, during market downturns:
| Investment type | What they are | Why they’re good in bear markets | Examples |
| Defensive stocks | Companies providing essential goods or services | Demand remains steady regardless of the economy | Staple food producers, utilities, health care products |
| Dividend stocks | Companies that regularly distribute earnings to shareholders | Provide steady income and reduce portfolio volatility | Telecom firms, insurance providers, energy companies |
| Value stocks | Stocks priced below their intrinsic value based on fundamentals | May already reflect pessimism, limiting downside and offering rebound potential | Banks, industrial manufacturers, legacy media companies |
| Strong balance sheet stocks | Firms with low debt, strong cash reserves, and healthy cash flow | Better equipped to survive downturns and avoid financial strain | Software companies, conglomerates, infrastructure providers |
| Gold and precious metals | Physical commodities or funds tracking metals | Seen as a hedge against volatility and currency risk | Gold, silver, platinum or palladium bullion, ETFs or mining companies |
| Short-term government bonds | Low-risk debt issued by stable governments | Offer capital preservation and modest returns during market stress | 3-month Treasury bills, 2-year government notes |
| Consumer discount retailers | Companies selling budget-friendly goods to price-sensitive consumers | Often gain business as consumers cut spending in downturns | Discount grocers, wholesale clubs, budget clothing chains |
Seek professional advice
Consider consulting with a financial advisor who can provide guidance tailored to your specific financial situation, risk tolerance and investment goals. A
Remember, investing in a bear market can present opportunities, but it also involves risks and may not provide immediate returns. It's important to conduct thorough research, stay informed and make decisions that will align with your investment strategy over time.
Investing in a bear market FAQs
Is it good to invest in a bear market?
Yes, investing in a bear market can be a smart long-term strategy. Stocks are often cheaper, offering opportunities to buy quality assets at a discount.
What investments do well in a bear market?
Defensive stocks, dividend-paying companies, short-term government bonds, and precious metals tend to perform better. Value stocks and companies with strong balance sheets are also popular picks.
What is the 7% rule in stocks?
The 7% rule typically refers to a stop-loss strategy where an investor sells a stock if it drops 7% below the purchase price to limit losses. It's used as a risk management tool.
Is a bear market a good time to buy?
For long-term investors, yes. While prices may fall further, bear markets offer chances to buy strong companies at lower values.
How long does a bear market last?
On average, a bear market lasts about 1.2 years, though some are shorter and others can stretch over several years depending on economic conditions.
What should I avoid during a bear market?
Avoid panic selling, overtrading or chasing speculative assets. Focus on quality investments and a long-term plan instead.
Can you make money during a bear market?
Yes, through dividend income, short-selling (for experienced traders) or by buying undervalued assets that rebound when the market recovers.
