What you should know about investing in a bear market

During times of market volatility, it's natural to question if we're in a bear market—and if so, how to handle it. Tracking bull or bear markets can be tricky. Typically, these phases only become clear in hindsight, once certain patterns emerge and play out.

Luckily, a strong investment strategy can offer you a more solid footing, bear market or not. To help you manage your investments more steadily, start by familiarizing yourself with some signs of a bear market and what might be going on behind the scenes.

A bear market refers to a time when prices of securities, such as stocks, bonds or commodities, are falling. Generally, a bear market sees a 20% decline in a major market index, such as the S&P 500, from the most recent market high.

During this time, investors may start to feel pessimistic about the market's future direction. Some investors tend to sell their investments and move toward safer assets, such as cash or government bonds, to protect their capital from further losses. This selling pressure often leads to declining prices, as increased supply overwhelms demand.

Various factors can cause bear markets, including economic recessions, geopolitical tensions, rising interest rates, corporate scandals or negative news that erodes investor confidence. These markets can be challenging for investors and can result in substantial losses to their portfolios.

However, bear markets are a normal part of the market cycle. They typically alternate with bull markets, which are characterized by rising prices and optimistic investor sentiment. While bear markets can be stressful, they also can allow investors to purchase assets at lower prices in anticipation of future growth when the market eventually recovers.

A bear market lasts around 1.3 years on average. However, a bear market's duration can vary significantly. Some bear markets may be relatively short-lived, lasting a few months, while others can persist for years. The timespan depends on factors like the underlying causes of the market decline, economic conditions and investor sentiment.

Though the specific details can differ from one market cycle to another, bear markets usually go through these phases:

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. The market reaches a peak, followed by a period of consolidation or minor declines.

The market experiences a significant drop, usually triggered by a specific event or negative news. This decline might be sharp and catch investors off guard. Selling pressure increases as investors react to the negative sentiment and seek to protect their investments.

Investor fear and negative sentiment intensify as the decline continues. Panic selling becomes more prevalent as investors rush to exit the market. This phase is often characterized by high trading volumes, increased volatility and a general sense of pessimism.

Eventually, the market reaches a bottom, where prices stabilize or experience a period of consolidation. It's challenging to predict the exact bottom, but signs of stabilization may include decreasing selling pressure, reduced volatility and some positive news or economic indicators.

After hitting a bottom, the market gradually starts to recover. This phase may be accompanied by improved economic conditions, positive news and a shift in investor sentiment. Prices begin to rise, and investors become more optimistic about the market's future prospects.

Bull vs. bear market

A person checks the performance of their investments on their phone and laptop.

Bull vs. bear market

While a steadfast approach is often best, you may consider different investments better for bull vs. bear markets.

Dive deeper

Just like investing during a recession, investing during a bear market can offer benefits and pose risks. Consider these factors as you decide if investing during a bear market makes sense for your financial plan:

• 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.

• 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.

Successful bear market investing requires careful consideration and a strategic approach, and you may want to work closely with your financial advisor as you think it through. These tactics also could help you navigate the murky waters:

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.

Spread your investments across different asset classes, sectors and geographic regions. Diversification can help reduce risk by not putting all your eggs in one basket. Consider a mix of stocks, bonds, cash and alternative assets to create a well-rounded portfolio.¹

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.

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.

Regularly investing the same amount of money, regardless of market conditions, is known as dollar-cost averaging. In a bear market, this approach can allow you to buy more shares or units when prices are low, potentially lowering the average cost per share over time. This strategy can help smooth out the impact of short-term market volatility and can lead to favorable long-term results.²

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. Emotional decisions often lead to poor outcomes. Maintain a long-term perspective and focus on the fundamentals of your investments.

Having cash reserves on hand can give you flexibility and the ability to take advantage of investment opportunities that may arise during a bear market. Cash also can provide a sense of security and act as a cushion against unexpected financial needs.

Periodically review your portfolio to assess its performance and alignment with your investment goals. Rebalance your portfolio if necessary to maintain your desired asset allocation. This rebalancing act can help to more evenly spread out your investment performance.

Consider consulting with a financial advisor who can provide guidance tailored to your specific financial situation, risk tolerance and investment goals. A financial advisor can help you navigate the complexities of a bear market and provide objective insights.

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.