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4 Bear Market Investing Strategies to Ride Out a Market Downturn


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As you start to invest in the stock market, you’ll hear the terms “bull market” and “bear market” often. Bulls are those who believe stocks will rise and bears are those who believe stocks will fall.

Therefore, in a bull market, the overall stock market experiences a months-long or sometimes years-long run for the top. Conversely, in a bear market, stock prices tend to fall.

Investing in a bull market is relatively simple. Although research is still necessary, finding stocks on an uptrend in a bull market that are likely to produce decent returns is a relatively simple concept. It’s not as hard to pick a winner when everything is going up.

Unfortunately, the opposite is true in bear markets. This makes investing in bear markets a bit more difficult.

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When the majority of stocks are experiencing declines, traditional investment strategies will generally turn up more of the same. As a result, in bear markets, investors must become a bit more creative in order to turn a profit, but that doesn’t mean it’s impossible.

What Is a Bear Market?

A bear market happens when stock prices decline, but what exactly defines a bear market? Every day the overall market is down, is the stock market experiencing a bear market? Do bear markets only occur across the entire market?

Obviously, there are quite a few questions surrounding the concept.

Stock prices fluctuate from day to day. It’s pretty common and normal to see both gains and declines over any significant period of time. However, a bear market is defined by the amount by which stocks are declining.

Any time a group of stocks sees a downturn of 20% or more from recent highs, the market is in bear territory. Bear markets can take place across the stock market as a whole or in sectors.

For example, the market as a whole may be doing great, but an oil supply glut could cause the price of oil to plummet and send energy stocks into a tailspin over a prolonged period of time, eventually leading them to declines of more than 20%.

In this example, the overall stock market is experiencing a bull market, but the oil supply glut has sent the energy sector into a bear market.

When a bear market hits a sector, it hits the entire sector, regardless of your asset allocation within that sector. In the example above, the declines will impact individual oil and energy company stocks as well as the index funds, exchange-traded funds (ETFs), mutual funds, and other investment vehicles focused in the sector.

What to Look for in a Bear Market

If a bear market is only sectorwide, it’s easy to get around it. Simply stay clear of the sector in the short term until the bear market is over and the bulls begin to take hold.

But what happens when the overall market is in a bear market? What exactly should investors be looking for in these cases?

There are a few considerations:

Assets That Hold Their Value

There are several assets that hold their value well, even in the face of bear markets. These assets often include dividend stocks, precious metals, and consumer staples stocks.

Safe-haven assets are discussed in more detail below.

A Strong Balance Sheet

If you choose to invest in stocks during a bear market, make sure the companies you invest in have a strong balance sheet. Ultimately, the company should have enough money on hand to get through the tough times.

As the COVID-19 pandemic showed us, the tough times can last for months or even years. Luckily, however, most bear markets are short-term events. A balance sheet with enough cash on hand to get through about six months of choppy markets should suffice for most companies.

Contrarian Investments

A contrarian investor follows an investment strategy that goes against the grain.

Because of the pain caused by declines in a bear market, investors often feel as though the sky is falling and the declines are here for the long term. However, history has provided evidence that bear markets are generally short-term.

So, while everyone is selling, sending prices further down, take the Warren Buffett approach and buy into the discounts by seeking investments that are trading at unrealistic lows.

Top Investing Strategies for a Bear Market

If you’re planning on investing in a bear market, you’ll want to ditch some traditional strategies employed in a bull market like momentum investing. You don’t want to follow the momentum through the downturn.

Nonetheless, it is possible to make money in a bear market, and there are several investing strategies you can employ to do just that. Some of the most popular strategies for investing in a bear market include:

1. Dollar-Cost Averaging

Dollar-cost averaging is a strategy investors employ to protect against the heavy market volatility that’s generally seen during bear markets while increasing potential profitability as the bulls start to take control.

When an investor practices dollar-cost averaging, they don’t make large investments all at once. Instead, the investor spreads investment over a predetermined schedule, which provides immediate exposure in case a reversal takes place and a bull market begins, while limiting losses should the bear market continue.

For example, if you have $10,000 to invest in ABC stock, instead of buying $10,000 worth of shares today, you would spread this purchase out by making 10 $1,000 investments over a period of time. You might make these investments with one or two weeks between each purchase.

By making the investment over time, if the stock continues to fall, the average cost paid to purchase the shares will be reduced, allowing you to afford more shares and enjoy larger gains on the rebound.

Should the uptrend begin while you’re in the process of dollar-cost averaging, all the money already invested out of the total lump sum will immediately begin producing returns as a result of gains in the stock price.

2. Income Investing

Income investing is the process of purchasing assets known for generating income. The most common assets targeted by income investors are real estate, high-yield dividend stocks, and income-focused ETFs, mutual funds, and other funds.

During down markets, real estate is a popular buy because it’s generally easier to purchase a piece of real property at a discount to market prices when money is hard to come by.

Dividend stocks, ETFs, mutual funds, and other income-focused funds are known to experience far less volatility than growth stocks or momentum stocks. These companies are generally in the utilities and consumer staples sectors, which are shielded from economic downturns by providing products and services that consumers can’t live without.

By focusing on income-generating investments, you have the ability not only to avoid significant declines but also to earn consistent income that will help to offset any declines in the valuations of your core investment portfolio assets.

Pro tip: Before you add any stocks to your portfolio, make sure you’re choosing the best possible companies. Stock screeners like Stock Rover can help you narrow down the choices to companies that meet your individual requirements. Learn more about our favorite stock screeners.

3. Short Selling

Short selling is a bit of a taboo strategy in the stock market, with most participants on Wall Street shunning those who take part in the practice. However, there’s no discounting the fact that short selling can lead to significant profits, especially in a bear market.

Short sellers borrow stock from investors who already own shares through a mutual broker for a small fee. Then they sell the stock immediately on the open market.

The short seller essentially bets that the price of the stock will fall before they have to repay the borrowed shares, and if it does, they’re in for big gains.

When the stock falls, the short seller repurchases the shares at a lower stock price, making the spread between the price it was sold and the price it was purchased back, minus any fees, as a profit.

For example, let’s say ABC stock is trading at $10 per share. You believe the stock will fall, so you short it, paying a fee of $0.05 per share to borrow the shares.

A month later, ABC stock is trading at $9 per share, so you buy all shares back to return them to the original investor. In this case, you would make $1 per share minus $0.05 per share in fees, for a net profit of $0.95 per share or 9.5%.

Short selling can also be a risky business. You will be required to return borrowed shares regardless of which direction stock prices go. If the stock climbs from current market prices, you’ll assume losses that are further exacerbated by the fees you paid to borrow the shares.

As a result, short selling is not an investment strategy that should be used by beginners or investors with a low risk tolerance.

4. Safe-Haven Asset Allocation

One of the easiest ways to protect yourself during a down market is to go through the process of rebalancing your investment portfolio to include more safe-haven assets.

A heavy safe-haven allocation in a bull market will severely limit your potential for gains and could lead to losses. However, in a bear market, investing in safe-haven assets will help to limit losses and could even lead to gains.

Safe-haven assets are assets that are known to hold their value or rise in value during tough economic times and bear markets. These assets aren’t the prime choice in a bull market because they don’t experience the momentous growth some stocks and other assets are known for.

One of the most popular safe-haven investments is gold. When Wall Street sees a bear market taking hold, they tend to ditch their stock investments and start moving toward gold and other precious metals.

This activity leads to an increase in demand for gold and other precious metals. Because the supply of these commodities hasn’t changed, the increased demand forces gold prices upward, giving investors a way to generate returns even in the face of marketwide declines.

Safe-Haven Assets to Consider

There are several safe-haven assets that investors flock to when economic times are concerning and market declines are in full swing.

Keep in mind, diversification is key any time you invest. When investing in poor market conditions, the protection provided by diversification is even more important. Choose a few different types of safe-haven investments and diversify well between them.

Dividend Stocks, Mutual Funds, and ETFs

During a broad bear market, declines are seen in the vast majority of stocks, mutual funds, and ETFs. However, there’s a specific class of investments known as income or dividend investments. These investments are known for paying dividends but don’t offer much by way of momentum or volatility.

When market conditions are positive, these stocks won’t make any extreme runs for the top, but they’re not known for dramatic declines under poor market conditions either. This makes them a great option for those looking to protect their funds in a bear market.

Pro tip: If you’re looking to add gold to your portfolio, you can buy and sell through Vaulted. Once you purchase gold through Vaulted, you can either take delivery or choose to store it at the Canadian Royal Mint.

Precious Metals

Precious metals like gold and silver are used in much more than the manufacturing of jewelry. In fact, one of the major causes for peaks and valleys in the demand for precious metals is investor interest.

In general, gold, silver, and other precious metals experience dramatic gains when economic conditions are poor. Because bear markets emerge when economic conditions are concerning, this is the perfect time to look into gold and silver coins and bars as a way to protect your assets and potentially grow your bottom line.

Consumer Staples Stocks

Consumer staples are products that consumers either cannot or will not live without. Think about staples like toilet paper, food, water, and other necessities. Regardless of the state of the economy, people need these items.

By investing in companies that manufacture consumer staples, you’ll be investing in companies that are all but guaranteed to make a lot of money, even in tough times. As a result, consumer staples stocks and ETFs are great options to consider in bear markets.

Inverse ETFs

A form of leveraged ETF, inverse ETFs are designed to go in the opposite direction as the underlying market index or sector it covers. For example, an inverse ETF that’s based on the Nasdaq has a diversified list of investments that are designed to produce the opposite returns of the Nasdaq.

To create the inverse reaction to the underlying asset, inverse ETFs invest in derivatives like futures in an attempt to profit from down markets. Therefore, when the market is going down and you want the opposite, inverse ETFs are a strong option to consider.

Due to the investing strategies used by inverse ETF managers, fees are higher on these types of investments, so it’s important to do your research and get a good understanding of the fees you’ll be charged and the risks of leveraged funds.

Final Word

Bear markets are scary times for just about any investor. However, even if the overall market is falling, it’s possible for you to meet your financial goals by keeping a diversified portfolio of safe-haven assets and follow strategies designed to generate a profit during market declines.

The good news is that bull markets tend to last much longer than bear markets. So, even if the market is experiencing painful declines, you can rest assured it’s likely to turn around soon.

Because bear markets don’t usually last long, it’s important to prepare and act, but also to stay on top of your investments. When markets begin to rebound, you’ll want to quickly rebalance your portfolio and prepare for the bulls to take control.


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Joshua Rodriguez has worked in the finance and investing industry for more than a decade. In 2012, he decided he was ready to break free from the 9 to 5 rat race. By 2013, he became his own boss and hasn’t looked back since. Today, Joshua enjoys sharing his experience and expertise with up and comers to help enrich the financial lives of the masses rather than fuel the ongoing economic divide. When he’s not writing, helping up and comers in the freelance industry, and making his own investments and wise financial decisions, Joshua enjoys spending time with his wife, son, daughter, and eight large breed dogs. See what Joshua is up to by following his Twitter or contact him through his website, CNA Finance.