How to Invest in a Bear Market

There's something counterintuitive about investing in a bear market. As traders jump into a plunging market, they must be willing to embrace the likelihood of further losses before seeing potentially greater returns when the bear finally yields to the bull. It's a hard pill to swallow, and many investors just can't do it. As a result, they can miss out on the opportunity to buy low.

Everyone's heard the saying "Don't try to catch a falling knife." As wise as this may sound, it doesn't help much when the bear rears its ugly head. That's because, in a bear market, it could be raining knives for quite some time. There's an upside, though: A falling stock is only a proverbial knife if you catch it the wrong way.

When markets fall, strategic traders want to catch as many high-value—yet discounted—stocks as possible without hurting themselves in the process. So how can they position themselves for the next bull market without getting mauled?

It might help to better understand the basics of tracking this type of market.

A bear market is a fundamentally-driven market decline of 20% or more. These often coincide with a weakening economy, massive liquidation of securities, and widespread investor fear and pessimism.

According to CFRA data on the S&P 500^® index, the shortest bear markets lasted about three months in 1987 and 1990. This excludes the tariff-related plunge in April 2025, which technically brought the major indexes into bear-market territory, but only for three trading days.

The longest bear market lingered for three years, from 1946 to 1949. Taking the past 12 bear markets into consideration, the average length of a bear market is about 14 months.

Here are a few strategies to consider when investing in a bear market.

Don't go all in at once: Going "all in" means throwing one's entire stake into a single bet. If the trade goes well, it's a profit. If not, a trader can lose all their buying power and face a string of painful losses ahead.

The problem with a bear market is that it's impossible to tell whether it's at the beginning, middle, or end. Imagine putting all investable funds into a bear market that just got underway. What happens if the entire portfolio sharply loses value and consistently drops for several months?

Don't "go big or go home" if it means losing your home, figuratively speaking. Investing is about taking calculated risks, not betting on a lucky hand. So, what are the alternatives?

Build a portfolio small chunks at a time: Suppose a trader who wants to snatch up discounted shares of strong companies decides the current market environment suggests a bear economy and not a mere correction. The difficulty is in predicting how long or deep the bear market will go.

Instead of going all in at once, one might consider buying small chunks at a time, a strategy called dollar-cost averaging. Consider investing a small percentage in discounted shares based on risk tolerance and what's affordable.

Once the "buying low" begins, immediate positive returns aren't likely amid a bear market. Traders should instead focus on positioning their portfolios for the next bull market.

Although most stocks and sectors may fall during a bear cycle, some will buck the trend. And once the bear market ends, stocks in certain sectors may jump ahead of others. Unfortunately, sector rotation isn't easy to predict. 

Cast a wide net to catch potential winners: When a trader buys a stock, they own the risk and growth potential of that business. If the business performs well, the shares rise in value. If not, the share value may sink. If stock holdings are concentrated in a single industry or sector, the same principle applies but on a larger scale. Hence, the value of diversification. Interestingly enough, traders can diversify their portfolios with as few as 12 stocks, targeting stocks in all major sectors.

Although diversification doesn't eliminate the risk of experiencing investment losses, it can help increase the chances of capturing better-performing assets and avoid the risk of losing overall portfolio value to any single business, industry, or sector. 

During a bear economy, most stocks tend to fall; that's to be expected. Remember that the goal of trading in a bear market is to position a portfolio for an upcoming bull market by getting a preparatory boost with discounted stocks.

Some analysts have argued that the tail end of a bear market is characterized by the steepest levels of panic selling.

So, might this extreme end of market pessimism shine the "go" light for investors? If a trader is dollar-cost averaging carefully, the green light may always be on. But many investors miss the start of bull markets by staying on the sidelines because of fear, or they may attempt to time the market (which usually doesn't work). Remember, time in the market is more important than timing the market.

When a bear strikes, share prices fall hard and market values get lower. Mentally, this may trigger a sense to "buy low," which is generally a smart thing to do. But emotionally, it's hard to hold assets that are losing value for weeks or months at a time.

Exercise prudence and patience, and keep a strategic eye on downtrodden, yet valuable, assets. A bear market may not be a time to reap gains, but it's arguably a great time to sow the seeds for the next bullish season.