What Is A Bear Market? Definition, Causes & Investing Tips

One way to invest during a bear market is to focus on stocks that provide income, i.e., dividend-paying stocks. Using a dollar-cost averaging strategy isn’t limited to bear markets, but it may be useful if the market does experience a downturn. •   Advanced strategies like shorting stocks, purchasing put options, and using inverse ETFs can profit from declining prices but carry significant risks and complexity for inexperienced investors. Funds that concentrate investments in specific industries, sectors, markets or asset classes may underperform or be more volatile than other industries, sectors, markets or asset classes and the general securities market. These risks often are heightened for investments in emerging/ developing markets or in concentrations of single countries.

Types Of Fixed-income Investments To Consider:

• We believe everyone should be able to make financial decisions with confidence.
• As financial markets ebb and flow, investors often find themselves grappling with the inevitable downturns—commonly known as bear markets.
• A bear market is defined by a prolonged period of declining asset prices, typically falling by 20% or more from recent highs.
• The first thing to do in a bear market is to make sure your portfolio is properly diversified between a variety of asset classes, not just stock market sectors.
• Various factors can contribute to the loss of consumer confidence, such as changes to interest rates, global events, falling housing prices, or changes in the economy.

A consistent investment strategy can offer you a more solid footing, bear market or not. But labeling bull or bear markets in the moment can be tricky. Diversifying one’s portfolio and prioritizing strong, well-capitalized balance sheets over hype when it comes to stock selection can pay off huge even if prompted smartytrade review by a bear market. A bear market is not for the faint-hearted, nor is it usually the right time to take outsized risks. Government bonds and defensive stocks historically perform better during a bear market. Of course, those are also the stocks likely to get savaged if the hoped-for bull market turns out to be another bear market rally.

The term bear market can also be used to describe a specific security. While maintaining a cash position can offer flexibility and security during volatile times, consider allocating a portion toward investments that offer long-term growth potential. Finding investment opportunities in a bear market involves thorough research and analysis.

It is possible to lose more than your initial investment when using margin. However, others might consider it an opportunity to utilize strategies to take advantage and potentially, generate returns. Similarly, one asset may increase a lot in value, but it’s hard to predict which one, so diversifying increases the chances that one will be exposed to the upward trend, and you’ll see a gain. This way, if one type of asset goes down a lot, the others might not go down as much. Investors may think that the market decline has ended and start buying, but it may in fact continue to decline after the rally. This happens when the market goes back up for a number of days or weeks, but the rise is only temporary.

Defensive Investment Strategies For Bear Markets

He is an expert on personal finance, corporate finance and real estate and has assisted thousands of clients in meeting their financial goals over his career. Andy Smith is a Certified Financial Planner (CFP®), licensed realtor and educator with over 35 years of diverse financial management experience. Inc. (Member SIPC), and its affiliates offer investment services and products.

How Can Diversification Help During A Bear Market?

Additionally, to address concentration risk and reduced hedged reliability of traditional assets, consider what we call a “diversified diversifier” using alternative strategies and asset classes that have a low correlation to stocks. Bear markets may last a few months to a year or more, but most bear markets end within a year’s time. Short selling is a very risky strategy that some investors take on in anticipation of a potential bear market.

• Equity-bond correlations have recently become less positive for longer stretches of time in intermediate parts of the curve than in much longer durations (Figure 6).
• Dollar-cost averaging is an investment strategy that can be particularly effective during bear markets.
• Bear markets often induce panic selling that can tempt anyone to liquidate stocks in favor of cash or short-term government bonds.
• The 2008 financial crisis, which was a part of the Great Recession, actually started in 2007, when the global economy contracted.

Regularly Review & Rebalance Your Portfolio

AI and non-AI companies comprised by a custom basket by GPS Investment strategy. AI remains our top equity investment theme, as we believe the market continues to underappreciate the opportunity of the AI data center buildout. This information should not be relied upon as research, investment advice, or a recommendation regarding any products, strategies, or any security in particular. Still, the prevalence of the AI theme within investor portfolios, whether they’ve intentionally allocated to it or not, introduces risks of higher concentration and correlations. Across asset classes, AI remains the dominant theme for investors, as it catalyzes a capital-intensive expansion, boosting productivity and sustaining earnings strength.

Can A Bear Market Wipe Out All My Bull Market Gains?

• Understanding market trends and historical performance during previous bear markets can also guide your investment choices and help you identify potentially undervalued assets.
• This way, if one type of asset goes down a lot, the others might not go down as much.
• Stick to your investment strategy, and avoid trying to time the market.
• A bear market is a fundamentally-driven market decline of 20% or more.
• Diversification reduces the impact of a downturn in any single investment by spreading risk across various asset classes and sectors, providing stability to your portfolio.

On October 19, 1987, the markets crashed by over 20%. But if taxes are paid from your Bear Market Reserves, you can take advantage of lower market values without sacrificing the recovery and long-term growth potential. While that is mathematically a true statement, that doesn’t mean you need lifetime income from an annuity. Contributors, including fiduciary financial planners, wealth managers, CEOs and attorneys, provide actionable advice about retirement planning, estate planning, tax strategies and more. It’s the next market crash that causes investors to hold their breath and hope for the best.

• Emerging markets remain a compelling source of income with constructive fundamentals and clean technical positioning even after a strong 2025.
• Your twice-a-week roundup of promising stocks, funds, companies and industries you should consider, ones you should avoid, and why.
• Many investors who sell during a downturn will miss out on the sharp rallies that usually mark the bear market’s end, significantly lowering their long-term returns.
• Investors and market watchers generally define a bear market as a drop of 20% or more from market highs.

• A bear market is typically defined as a period during which stock prices fall by 20% or more from their recent highs, often accompanied by widespread pessimism and negative investor sentiment.
• Periodically review your portfolio to assess its performance and alignment with your investment goals.
• There’s no such thing as a safe investment, but some investments that tend to have lower risk profiles include bonds, Treasurys, and even certain commodities like precious metals.
• Easing policy rates should prove a boon to risk assets, but present new challenges for investors seeking reliable income sources.

As a result, investors likely have more time than they think to respond to the stock market’s sagging fortunes, whether by adopting prudently defensive portfolio positioning or by speculating on continued declines. Inaction by default is never the right answer, if only because bear markets tend to stick around for more than a couple of months. And once the bear market ends, stocks in certain sectors may jump ahead of others.

She has covered personal finance and investing for nearly 20 years, and was a senior writer and spokesperson at NerdWallet before becoming an assigning editor. Arielle O’Shea leads the investing and taxes team at NerdWallet. Alana Benson is an investing writer who joined NerdWallet in 2019.