How to Invest During a Bear Market: Top Strategies to Gain From a Downturn

Bear markets may be terrifying for most investors – but they can still present attractive buying opportunities for those willing to act. So, how to invest in stocks during a bear market?

A stock market downturn can send share prices tumbling virtually overnight and wipe millions of dollars from the value of investors’ portfolios. But even though such scenarios can be financially devastating, the good news is that it’s still possible to profit from investing in a down market.

Our guide on how to invest during a bear market covers the top investment strategies that can be employed to turn a negative situation into a positive one.

Key Takeaways

  • A bear market occurs when a broad stock market index falls by 20% or more over a period of approximately two months.
  • The average bear market lasts 289 days – or about 9.6 months – with stocks losing an average of 35%, according to Hartford Funds.
  • Investment strategies to consider include buying stocks at a discount, focusing on dividend-payers, and becoming more diversified.
  • Not every company recovers well from a stock market downturn. There are still plenty that are trading at lower levels than before the Covid-19 pandemic.

What Is a Bear Market?

A bear market happens when stock prices are declining, and market sentiment is pessimistic, according to the US Securities and Exchange Commission. It stated:

“Generally, a bear market occurs when a broad market index falls by 20% or more over at least a two month period.”

The average length of a bear market is 289 days – the equivalent of about 9.6 months – with stocks losing an average of 35%, according to Hartford Funds.

The study found bear markets generally happened every three and a half years but weren’t necessarily precursors to economic recessions.

“Assuming a 50-year investment horizon, you can expect to live through about 14 bear markets, give or take,” it stated. “Although it can be difficult to watch your portfolio dip with the market, it’s important to keep in mind that downturns have always been a temporary part of the process.”

Length and Depth of the Latest Bear Markets & S&P 500 Losses

Length and Depth of the Latest Bear Markets & S&P 500 Losses
Source: Fidelity

 

Bear Markets: How Deep is the Loss?
Start End Length of Bear Market (in Months) Length of Recovery (in Months) S&P 500 Decline

(%)

January 3, 2022 October 12, 2022 10 -25%
February 19, 2020 March 23, 2020 1 5 -34
October 9, 2007 March 9, 2009 17 49 -57
March 24, 2000 October 9, 2022 31 56 -49
August 25, 1987 December 4, 1987 3 20 -34
November 28, 1980 August 12, 1982 20 3 -27
Source: Statista, Forbes

How to Trade in a Bear Market

A bear market happens when many people become concerned about the value of stocks and sell their investments around the same time, according to Fidelity. It stated:

“Investors can get anxious about the future of investments for many different reasons—from global conflict and elections to shifting regulations and changes in consumer spending patterns.”

Therefore, your first task is to understand what’s causing the stock market downturn and whether it’s likely to be resolved in the short term or drag on for months.

The good news is that it’s still possible to make money in a bear market, according to Ben Yearsley, director of Fairview Investing. He told Techopedia:

“Not everything goes down, just as not everything goes up in a bull market. Don’t forget, seven stocks drove something like 80% of the returns of the S&P 500 last year.”

While Yearsley accepted that investors sometimes needed to be cautious during such volatile periods, he pointed out that it depended on how active they wanted to be.

“I’d rather have a long-term asset allocation that has different elements,” he added. “This means there’s always something working for you.”

S&P 500 Index Declines of 20% or More, 1929–2023

Start and End Date % Price Decline Length in Days
9/7/1929–11/13/1929 -44.67 67
4/10/1930–12/16/1930 -44.29 250
2/24/1931–6/2/1931 -32.86 98
6/27/1931–10/5/1931 -43.10 100
11/9/1931–6/1/1932 -61.81 205
9/7/1932–2/27/1933 -40.60 173
7/18/1933–10/21/1933 -29.75 95
2/6/1934–3/14/1935 -31.81 401
3/6/1937–3/31/1938 -54.50 390
11/9/1938–4/8/1939 -26.18 150
10/25/1939–6/10/1940 -31.95 229
11/9/1940–4/28/1942 -34.47 535
5/29/1946–5/17/1947 -28.78 353
6/15/1948–6/13/1949 -20.57 363
8/2/1956–10/22/1957 -21.63 446
12/12/1961–6/26/1962 -27.97 196
2/9/1966–10/7/1966 -22.18 240
11/29/1968–5/26/1970 -36.06 543
1/11/1973–10/3/1974 -48.20 630
11/28/1980–8/12/1982 -27.11 622
8/25/1987–12/4/1987 -33.51 101
3/24/2000–9/21/2001 -36.77 546
1/4/2002–10/9/2002 -33.75 278
10/9/2007–11/20/2008 -51.93 408
1/6/2009–3/9/2009 -27.62 62
2/19/2020–3/23/2020 -33.92 33
1/3/2022–10/12/2022 -25.43 282
Average -35.24 289

Source: Hartford Funds and Ned Davis Research, as of June 30, 2023

How to Invest During a Bear Market: 6 Strategies to Consider

There are many investment strategies that can be adopted during a downturn and the most suitable will depend on your investment objective and attitude to risk.

For example, you can cut your losses and withdraw your money, switch your focus to different types of stocks, maintain existing positions, or even start investing more.

1. Go Defensive

Some of the favored bear market stocks are companies providing goods and services that are likely to remain in high demand – almost irrespective of the economic backdrop.

Such companies may include Procter & Gamble, the multinational consumer goods business behind brands such as Gillette and Braun.

As Fairview’s Ben Yearsley noted:

“There are more defensive equities, such as infrastructure and assets people need to use. Bonds should work well in any coming bear market as finally they have a sensible yield.”

2. Search Dividend Payers

The next strategy is linked to being defensive and involves buying into dividend-paying companies that are seen as attractive bear market investments.

These stocks are usually well-established, reliable businesses that regularly pay their investors a dividend out of their annual profits.

The hope is that the level of these pay-outs will be maintained, even during a wider downturn, although this will depend on the individual company.

3. Become Diversified

A great way of protecting yourself in a stock market downturn is by making sure your portfolio is properly diversified.

The idea is that you have a broad spread of assets in the hope that not everything will be falling by the same amount. Some areas may be unaffected – or even increase.

You can do this in terms of broad asset class exposure, such as having a mix of stocks, bonds, and alternatives, as well as within one particular asset class.

For example, you can diversify equity by geography, sector, and industry, as well as by blending stocks with different market capitalizations.

4. Pick up Bargains

Contrarian investors find out which stocks have suffered the most and buy into them when they have lost a substantial amount of their value.

Their hope is that the stock market has unfairly punished these companies, and their share prices will rebound strongly, providing them with a handsome profit.

However, you’ll need to do research on the companies involved to ensure you have a thorough understanding of why their stock price should recover.

5. Embrace Dollar/Pound Cost Averaging

Unfortunately, accurately identifying the bottom of a bear market is difficult. That’s why one option is to invest a set amount into the markets each month, regardless of what’s happening.

This concept is known as pound/dollar cost averaging and is definitely worth considering, according to Darius McDermott, managing director of FundCalibre.

He told Techopedia:

“If you regularly invest £100 into the fund and have been buying units at £8 each, when they fall down to £6, you will get more units for your money.”

6. Wait It Out

History tells us that bear markets don’t last forever. Therefore, your final option could be not to do anything and simply wait it out.

The idea is that stock prices will eventually recover, and your chosen holdings will rise in value on the back of the subsequent bounce back.

However, you need to ensure the investment thesis behind individual companies hasn’t changed in the wake of the downturn.

Risks of Investing in a Down Market

Unfortunately, not every company will rebound strongly from a stock market recovery. Many are still struggling four years after the Covid-induced crash, according to AJ Bell.

The analysis covering the period from February 21, 2020, to February 15, 2024, found more than half of the FTSE 350 in London were still trading below their pre-pandemic levels.

It also discovered that 142 stocks in the S&P 500, including Walt Disney, Hasbro, PayPal, Estee Lauder, and American Airlines, had also failed to recover properly.

Dan Coatsworth, investment analyst at AJ Bell, pointed out the UK was more focused on areas such as telecoms and housebuilding, which have disappointed on a sector basis since the start of Covid.

He added:

“However, the US also has its fair share of laggards, including the travel sector, which has experienced a volatile comeback from the pandemic, and the healthcare space, which has faced a multitude of challenges from uneven demand, production delays, and supply chain problems.”

Examples of Stocks That Haven’t Recovered From COVID Global Market Crash

S&P 500 stocks Share price change since the eve of the 2020 crash
VF Corp -80%
Warner Bros Discovery -67%
Walgreens Boots Alliance -58%
AT&T -56%
Boston Properties -56%
Illumina -52%
PayPal -51%
Match Group -51%
American Airlines -47%
Hasbro -41%
3M -41%
Tyson Foods -33%
Estee Lauder -32%
Citigroup -29%
Bristol Myers Squibb -26%
Whirlpool -26%
Pfizer -24%
Dollar General -21%
Walt Disney -20%
Brown Forman -18%
Source: AJ Bell. Data: February 21, 2020, market close to February 15, 2024.

The Bottom Line

The good news is that it’s possible to make a profit in a downturn, but investors need to acknowledge the risks when looking at how to trade in a bear market.

Investors used a variety of strategies to take advantage of such dips, including buying companies whose stock prices have taken a heavy hit and hoping they recover.

However, some companies may take years to bounce back – if at all – so investing in a downturn requires plenty of research when it comes to stocks and funds.

Do your own research and always remember your investment decision depends on your attitude to risk, your expertise in the stock market, the spread of your portfolio, and how comfortable you feel about losing money.

The information in this guide does not constitute investment advice and is meant for informational purposes only.

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Rob Griffin
Financial Journalist

Rob is a seasoned journalist with over three decades of experience spanning across business and finance journalism. Before embarking on a freelance career in 2002, he contributed his expertise to the business desks of notable publications such as the The Guardian, Yorkshire Post, Sunday Business (now Business Post), and Sunday Express. Throughout his freelance journey, Rob has been a regular contributor to a wide range of national newspapers, consumer magazines, trade publications, and websites. His work has appeared in titles such as The Independent, Citywire, Daily Express, FT Adviser, and Sunday Telegraph, covering an array of subjects from market trends…