How to Invest in a Bear Market – 5 Strategies

Everyone loves investing when there is a Bull Market. Stock prices keep climbing and climbing so people are comfortable buying at any time with the expectation that stock prices will continue to rally. As long as the Bull Market continues, stock investors continue to buy.

What happens though when the market makes a turn that’s longer than expected. Do we sell everything and panic? Do we hold it with no regard to downward risk? Some will advocate both of these options and we’ll go over these as well as five other ideas to consider.

Below are 7 strategies to show you how to invest in a Bear Market.

1. Do Nothing and Continue to Hold

This is the advice that many financial advisers and “industry experts” give. The idea behind this is that historically Bear Markets are always short-lived and eventually the Bull Market will resume and make up for losses. This means that you accept all the risks of the downward move and are banking on stocks recovering to new heights.

Although historically this is true, sometimes it can take years for stocks to recover their prices and depending on where you are in life, waiting may not be an option. Generally, the older an investor is, the more negatively this strategy can affect them whereas younger investors that intend to keep their money in the market for decades to come will probably have nothing to fear using this strategy.

As you see in the graph below from 1902 to 2015, even though there are very drastic dips in price, notably in the 1930s (The Great Depression) and more recently in 2008, the market generally continues an upward trend over time.

The younger you are, the more willing you may be to take this route whereas if you’re a year from retirement, this prospect can seem completely insane!

stock market performance

2. Take Some Money Off the Table

This is a way of staying the course with some of your money but tucking some away for safekeeping. For some, this approach makes a lot of sense because this limits some downward risk but allows the market to play out and hopefully bring what is left in stocks back to its former prices.

Although this keeps some money “safe,” it also locks in some loss. Whatever you take out of the stock market is now at a loss from where it was before the bear market began. Still, this at least protects what you do take out until the market volatility subsides a little.

To do this smartly, I would recommend searching your portfolio for the stocks that are the most overvalued since they will probably be the most at risk until the market steadies out. This strategy is also known as “selling to the sleeping point” which means sell enough so you can sleep at night. You can read more about this strategy at Kiplinger’s website.

3. Put All of Your Money in Cash

This is exactly what it sounds like. You take all the money out of equities and keep it out of the market till you think it’s safe to return. Selling off equities will lock in losses but prevent further losses. Once you feel like the market has turned, you can slowly re-enter.

If the reason you pulled out was due to the fear of the bear market though, you will not be alone. What’s important though is to not be drawn in too early when you start seeing the fear subside and people buy back in.

Often during a bear market, stocks will have short rallies as traders try to get in at a good price only to find that there is not enough true momentum for the market to reverse and it turns again and increases losses.

If you decide to get out 100%, I recommend reentering slowly by paying closer attention to the fundamental analysis of stocks and getting back in because you believe in the company rather than the hype.

Put All Money in Cash

4. Use Hedges to Reduce Risk

There are a few ways to reduce risk by using some sorts of hedge trades. There are a couple of ways to do this.

First, you can use Inverse ETFs. This means to buy shares of an ETF that trades the reverse of the market, so if the stock market goes down, the value of the ETF goes up. This ensures that although the rest of your stocks are still declining, the ETF will at least gain money to cushion the blow.

Another way to hedge your portfolio if it has more than 100 shares of a certain equity is to buy put options. A put option gives you the right to sell a contract (100 shares typically) for a set price by a certain date. If it’s February, you could buy a 60-day put that allows you to sell your shares for a set price regardless of how low it goes anytime before the expiration in April.

This is a more technical trade and I would recommend you do a lot more research about options trading before attempting this or talking to a broker or financial specialist to help explain it better.

5. Set Stop Losses

This is not one of my favorite strategies but it is something to consider. This means setting a price in your brokerage account or speaking to your broker on the phone or in-person to sell your stock if it hits a certain price. So if you have stock that is $200/share, you could set a stop loss at $180 so that if it hits $180, it sells your shares and prevents further losses.

What I don’t like about this is that there is a risk that the trade doesn’t go through. For example, if the stock was $190 at the end of one day and then opened the next morning at $175, it will have skipped over the $180 mark and not execute the sell order.

Meanwhile, you may think you’re safe and in reality, are continuing to lose. If you set a stop loss, you may consider paying closer attention to it.

Which Strategy is the Best?

planning which strategy is best

This depends on the individual. Some of these methods are more conservative than others.

Taking all money off the table may be the safer bet for people closer to retirement but honestly, if you are close to retirement, you should not have all of your money in the stock market. It’s just too aggressive.

So how do you know how much money you should have in the stock market, to begin with? The “Rule of 100” is a very common thumb rule used by and taught by many institutions. It’s a really simple way to help ensure you are not over-allocated in the stock market.

Take 100 and subtract your age. The number that’s left is the percentage of the money you should have at a maximum in the stock market.

If you are 30 years old, don’t have more than 70% of your money in stocks. If you are 65, don’t have more than 35% of your money in stocks. This will ensure that the closer you are to retirement, the safer your portfolio is and the more likely that a huge financial downturn in the market won’t ruin your retirement years.

The remainder of your money should be held in either cash (collecting small amounts of interest in a bank account) or in bonds.

Make sure you know the difference between stock and bonds. Cash and bonds are generally more conservative than stocks but offer a lower interest rate.

If you are younger, you may consider weathering the storm or pulling some out and reapplying it slowly as the market begins to turn. If you have any questions, seek a financial planner or professional money manager.

I hope you found this interesting, if so, please leave a comment below and share it with someone that you think may benefit from this.


12 thoughts on “How to Invest in a Bear Market – 5 Strategies”

  1. Do nothing and continue to hold is what a lot of people struggle to do. They see the market going down and IMMEDIATELY freak out like they’re going to lose out. The best thing to do is to stick it out and see what happens. You’ll not only pass everyone that pulled out and make a boatload of money, but you would’ve proven to yourself that you do anything. I also agree that when you are young (like me) you can take this type of risk, whereas if you’re older and need fast money, you should go with something else with faster returns. Thanks for the great article!

    • I do agree with you. I personally weather the storm since I’m still in my 30’s. As I age though, I’ll probably start pulling some assets out and diversifying into some less risk staples as well.

  2. I never knew the bear market was something a lot of people interested in. You never know when the price and demand could increase or when it could go down. It has its risks, but I believe it’s very much worth it if you’re really careful. This is an awesome article and I love the part where you mentioned the ‘Rule of 100’ by subtracting your age from 100 and using the percentage as the maximum amount of money you should have in the stock.

    • Thanks for commenting. Like all investing vehicles, the stock market has a lot of benefits as long as you are careful and do your due diligence.

  3. What are your thoughts on using ETFs or index funds to invest in stocks specifically?  I understand your note on the rule of 100s, but I’m not super comfortable purchasing specific stocks. I don’t really know how to read charts or all of the associated metrics. I’ve heard several times that ETFs have the lowest costs, but aren’t they balanced by a computer instead of a person?

    • ETFs can have a few stocks to several hundred stocks. I would recommend looking at any of the Vanguard ETFs since they are the ones I’ve had the most exposure to and they can show you their performance history.

      Also the fee associated with an ETF is a fraction of a percent whereas a Mutual Fund, like you mentioned, can charge 2-3% annually for the fund manager. That’s just crazy to me.I wrote a whole post on the difference between ETFs and Mutual Funds. To me, ETFs are always the better way to go.

  4. Many years ago a good friend of mine told me that if I have to be willing to go to sleep at night knowing that I could lose every penny of my investment and I have to be okay with that.

    That day I grew a great phobia of any kind of investing and I wish I could get over this phobia because I also know this friend of mine has made millions with his investing strategies.

    I was wondering if you know where I could get a very very basic article on investing very little money.

    Thank you so much for taking the time to write this and also for taking the time to read my comment.


    • I’m sorry you had such a negative experience with your friend. I would say that if you are using a diversified strategy and pay attention and learn about each of the companies you invest in before putting money forward, you are unlikely to lose it all overnight.

      Millionaire Peter Lynch was quoted as saying “The stock market really isn’t a gamble, as long as you pick good companies that you think will do well, and not just because of the stock price.”

      I’ve also written a post on how to start investing with little money.  If you are interested, feel free to visit!

  5. Thanks for this post Eric. I really like the rule of 100 the best. It helps one in proper investment planning. It makes a lot of sense to invest 70% of your money when you are 30. And the other way round when one is 70. I am learning that ones age plays a very important role when it comes to investing in stocks. 

    • Yes, as we age, we should reduce risk and focus on maintaining wealth and investing in lower risk assets with steady growth that outpaces inflation.

  6. Hello Eric:

    Thank you for your service. I’m a Veteran too. Now lets discuss your website. I’m not very familiar with the stock market and investing. Your topic did in fact educate me about bull markets and bear markets. Honestly, investing is not a strong ability that I have learned over the years. Most of the time I don’t have anything to invest with.

    Overall your website has good pertinent information and content. All of your links work properly. The only other thing I might consider are a bit more images.

    Thank you.

    Brian E.


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