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.

Table of Contents Table of Contents

1. Key Takeaways
2. What Is a Bear Market?
3. How to Trade in a Bear Market
4. How to Invest During a Bear Market: 6 Strategies to Consider
5. Risks of Investing in a Down Market
6. The Bottom Line
7. FAQs
8. References

Show Full Guide

Table of Contents

1. Key Takeaways
2. What Is a Bear Market?
3. How to Trade in a Bear Market
Show Full Guide
4. How to Invest During a Bear Market: 6 Strategies to Consider
5. Risks of Investing in a Down Market
6. The Bottom Line
7. FAQs
8. References

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

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

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.

FAQs