Bear Markets: What They Are and How to Invest in Them

Investing

Oct 28

How to invest in a bear market image Vision Retirement fiduciary RIA financial advisor CFP certified financial planner Ridgewood NJ Poughkeepsie NY

When the stock market takes a dive, it’s normal to feel anxious—and the dramatic headlines don’t help! Seasoned investors, however, know that such downturns (“bear markets”) are a natural part of the market cycle and can even provide investment opportunities with the right strategy and mindset. Here’s what you need to know to make smart investing decisions when the market is in retreat.

What is a bear market?

A bear market is generally defined as a decline of 20% or more in a broad stock market index (e.g., the S&P 500) from a recent high. This threshold, while somewhat arbitrary, signals that investor sentiment has shifted dramatically and the market is experiencing a period of significant and sustained selling pressure.

What causes bear markets, and how long do they typically last?

Bear market downturns are often triggered by a combination of factors such as slowing economic growth, rising interest rates, geopolitical uncertainty, and/or unforeseen shocks (e.g., a global pandemic).

For perspective, more than a dozen bear markets have occurred in the U.S. since World War II, each with its own cause and character. Some—like the 2008 financial crisis—were prolonged and deep, whereas others (such as the COVID-19 bear market in early 2020) were sharp but short-lived. Bear markets tend to last around 9 to 14 months on average, although individual cases vary widely. Given that the market is cyclical, each bear market is unique but typically arrives after a long bull run when investors perhaps feel overconfident or overly reliant on recent gains: rendering them psychologically and financially unprepared for a reversal.

Bear markets aren’t just about numbers, though, as a key factor involved is investor confidence replaced by fear, pessimism, and uncertainty. As anxiety rises, even solid companies can see their share prices fall simply because investors are pulling back across the board: creating a self-reinforcing cycle wherein falling prices shake confidence, which leads to more selling and prices that fall even further. Understanding this dynamic is critical as it reveals one of the most important truths about bear markets; they’re driven as much by psychology as they are by fundamentals.

Bear vs. bull markets: a matter of mindset and momentum

Bull and bear markets differ not only in stock price movement but in the overall mood of the market. In a bull market when optimism dominates, investors are more willing to take risks, companies tend to report strong earnings, and economic data is generally positive. In contrast, a bear market triggers a wave of caution whereby fear and uncertainty drive investor behavior and thus lead to widespread selling—even when some stocks remain fundamentally sound.

Those who view market declines as normal and temporary are ultimately better positioned to stay the course and can even potentially benefit from the recovery that historically always follows, especially important as reacting out of fear can compel one to lock in losses rather than ride out the storm.

What to expect in a bear market

When a bear market takes hold, the experience can feel chaotic and emotionally charged. Prices drop quickly, headlines turn negative, and volatility becomes the norm. One day the market may rally—giving investors hope that the worst is over—only to fall even more sharply the next. These types of swings (“volatility”) are a hallmark of bear markets and can rattle even the most experienced investors.

From a financial perspective, corporate earnings often shrink as consumer spending slows, business investment pulls back, and economic growth stalls or reverses. Job losses may rise, and key economic indicators such as GDP, manufacturing output, or retail sales may decline. A bear market sometimes coincides with a recession (two consecutive quarters of negative economic growth), but not always; while the two often occur simultaneously, it is indeed possible for the former to exist in the absence of the latter.

Bear markets can also feel especially disorienting since they challenge long-held assumptions. Stocks once considered “safe” or “unstoppable” may suddenly fall out of favor, and sectors that at one point seemed invincible (e.g., tech in 2000 or real estate in 2008) can take the hardest hits. Such discordance between investor expectations and market reality can make it tempting to abandon long-term plans in favor of short-term reactions.

How to invest during a bear market

Here are some tips when investing in a bear market:

Don’t panic

The most important rule during a bear market is simple: don’t panic. Emotional decision-making, especially with respect to decisions driven by fear, often leads to poor outcomes. Instead, keep your focus on the bigger picture and remember market declines are a natural part of the economic cycle. If you’re investing for a long-term goal like retirement, short-term fluctuations are just temporary noise. A well-thought-out investment plan is likewise built to endure both upturns and downturns, and what follows are a few strategies applicable at any time but often especially effective in a bear market.

Invest in sectors that hold up in a downturn

Not all portions of the market suffer equally during a bear market. Some sectors, often referred to as “defensive sectors,” are often more resilient such as utilities, healthcare, and consumer staples: all examples of industries that typically perform better during downturns since the goods and services they provide remain in demand regardless of market conditions. What’s more, many companies in these sectors offer stable earnings and consistent dividends that can provide a measure of income and stability during periods of market volatility.

Rather than cherry-pick individual stocks, many investors gain exposure to these sectors via exchange-traded funds (ETFs) or mutual funds that provide built-in diversification within a sector as a practical way to invest. You might also consider dividend-focused ETFs or low-volatility funds, which often hold companies from these same defensive sectors. While investing in these won’t eliminate risk entirely, doing so can help add resilience to your portfolio and reduce the impact of sharp market declines.

Diversify your portfolio

Bear markets reinforce the value of diversification, which means holding a variety of investments that react differently to the same market conditions. Bonds, for example, often perform better when stocks fall whereas real estate may hold its value or even rise when inflation increases. In other words, this strategy helps keep you from putting all your eggs in one proverbial basket.

Diversification isn’t limited to asset classes. Within your stock allocation, it’s wise to diversify across sectors, company sizes, and geographic regions: an approach reducing your exposure to risk in any one area and helping to keep your portfolio balanced throughout the market cycle.

Use dollar-cost averaging to smooth out volatility

During a bear market, investing more money may feel counterintuitive but is sometimes actually a smart move when done with a steady hand. Dollar-cost averaging (DCA), a great way to do just that, means investing a fixed amount of money at regular intervals (e.g., monthly or biweekly) regardless of what the market is doing. Rather than trying to time the bottom (which is nearly impossible), you buy more shares when prices are low and fewer when prices are high: helping to lower your average cost per share over time.

For example, let’s say you invest $500 a month in a market index fund:

· In Month 1, the fund trades at $100 per share (you buy 5).

· In Month 2, the price drops to $50 per share (you buy 10).

· In Month 3, the price rises to $75 per share (you buy 6.67).

In this three-month period, you’ve invested $1,500 and acquired 21.67 shares for an average cost of about $69.25 per share—lower than if you’d invested it all at once.

Dollar-cost averaging is especially helpful in a bear market as it removes emotion from the equation; rather than reacting to every dip, you continue investing on autopilot while trusting that the market will recover and grow over the long term. This disciplined approach transforms market volatility into an opportunity rather than a threat.

The biggest investment mistake to avoid: trying to time the market

Attempting to predict the exact bottom of a bear market is, quite frankly, a fool’s errand.

Most recoveries happen gradually, and the market often rebounds before the economic data starts to improve—meaning that if you’re sitting on the sidelines awaiting a “perfect” entry point, you could miss out on the best days of the recovery (which often come early and unexpectedly).

Bear markets, likewise, test your resolve. While it’s tempting to toss out your plan, discipline is what separates successful investors from the rest of the pack. Design your plan with risk tolerance, time horizon, and market cycles in mind, and should you feel anxious, consider reassessing—not abandoning—it. Are you properly diversified and invested according to your timeline? Making adjustments is wise; reacting emotionally is not.

The takeaway: maintain a long-term perspective during bear markets

The most successful investors understand that time in the market beats timing the market. Every bear market in history has eventually given way to a bull market, and over the long run, markets trend upward despite periodic setbacks. If you're investing for long-term goals like retirement, college savings, or generational wealth, short-term downturns are just noise. Focus on your time horizon, stick to your plan, and remember: volatility is a feature of investing, not a flaw. The best investors aren’t the ones who avoid downturns altogether but instead navigate them with confidence, clarity, and a long-term view.

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