How to React to, Prepare for, Invest In, and Maybe Even Take the Fear Out of Bear Markets
Bear markets occur when ...
A
... the broad market index falls by 10% or more
B
... the broad market index falls by 20% or more
C
... the broad market index falls by 35% or more
D
... markets fall and rise in such a way that the performance chart looks like a drawing of a bear
Bear markets occur when stocks go down by 20% or more for a consistent period. They tend to be connected to a recession, during which interest rates go down and bond prices go up — along with the risk of losing your job. Not a fun time.
Bear markets are scary, but they're a regular part of the stock market cycle.
The Four Stages of the Stock Market Cycle
Stock prices are the result of two things — valuations and earnings — that change based on investor expectations and company earnings.
Change in investors’ expectations of future profits
Actual change in profits
How stocks respond
Despair
Return
Hope
Growth
Optimism
60%
40%
20%
0%
-20%
-40%
i
i
i
i
Despair: Stock markets drop in response to bad news — rising unemployment, a spate of mediocre earnings reports, a war (or trade war). Investors are spooked. The economy may be doing fine, but the bad vibes trigger lots of selling.
Credit: the components of a stock market cycle were introduced by Peter Oppenheimer in his book, The Long Good Buy.
Between 1973 and 2024, the TSX had 15 bear markets, while the S&P 500 had seven.
Bear markets come and go (and come and go)
S&P and TSX returns over the last 50 years
6,000
5,000
4,000
3,000
2,000
1,000
0
1975
1980
1985
1990
1995
2000
2005
2010
2015
2020
2025
S&P 500 value
Bear markets
TSX value
Bear markets
Source: Bloomberg
Bear markets don't have a particular duration. The shortest was 33 days (the 2020 COVID crash), while the longest, in the 1930s, lasted more than five years. As for why the TSX experienced more bear markets, that could be because of its concentration in more volatile sectors, like energy.
When a bear market happens, it’s important to:
1
Breathe.
2
Maybe water your plants.
3
Turn off any videos that include a red-faced and sweaty person yelling “sell!”
4
If you can manage, don’t torture yourself
by constantly checking your portfolio.
Bear market or blip?
It’s not always easy to tell
And in the long run, it often doesn't matter. Here's a look at notable bad-news moments in world markets over the last 54 years.
Growth of a dollar
Source: MSCI World Index (net dividends), 1970-2024
The best way to invest during a bear market is to invest like it's not a bear market.
Long-term investors with well-diversified portfolios that are in line with their goals can survive market turmoil with little effect on their ultimate outcomes.
Studies mostly show that downturns aren’t investors’ biggest enemy. It’s how they react to those downturns that can cause problems.
Automated investments take timing out of the equation. Plus, it lets you take advantage of the one benefit of a bear market: everything feels like it’s on sale.
What if you're not prepared when a bear market hits?
… run away
Selling your assets can mean locking in your losses.
… be scared to reconsider your risk tolerance
Many investors over-estimate their risk tolerance — until a bear market comes and everything just feels awful. If that’s you, consider adjusting the risk in your portfolio by adding less volatile investments like government bonds, which tend to do pretty well during bear markets. Gold, too. Just keep in mind: you have to be willing to deal with reduced returns when a bull market arrives.
… try to time the bottom
Very few investors get this right. In fact, by the time most people feel comfortable getting back into the market, the biggest gains have usually been made.
… forget about tax-loss harvesting.
Tax loss harvesting is when you sell a stock that lost you money for a very similar one. You get a tax write-off while basically keeping your position in the market so that you are invested when the rebound occurs.
x
Hope: Markets are way down. Ditto for earnings. Investors are bummed, but a few buy stocks in the hopes the money tide will rise soon. Eventually, other investors notice and join in, buoying prices even more.
x
Growth: Companies finally deliver decent earnings, fulfilling the heightened expectations of the Hope phase. As profits rise, expectations of future growth come back down to earth. This leads to stable market conditions — for a time.
x
Tap or click on the bars to learn more about each phase of the market cycle
x
What is a bear market, anyway?
Optimism: The stock market is booming, with investors' high expectations driving returns. So much that it becomes hard for companies to beat them. At some point, something trips those companies up. When they don’t hit their goals, investors panic, and the cycle begins again.
x
1975
1980
1985
1990
1995
2000
2005
2010
2015
2020
2025
12,000
9,000
6,000
3,000
$0
Don't …
As the yo-yoing trade-war drama reminded us, stocks can shift into bear-market territory very quickly. These moments can be painful and scary, but they're also an unavoidable part of being an investor. While you can't completely tame the bear, you can take steps to at least feel somewhat comfortable when it shows up.
2022 interest rate hikes
2025 Trade war
A lot of drops that look like bear markets don't end up being bear markets.
If you zoom out and look at past stock performance, you‘ll often recognize a pattern with four distinct stages.
The best way to prepare for a bear market is by diversifying ...
For example, if you’re 40 years away from retirement in a portfolio made up of 90% stocks, you have to know that you’re in for some white-knuckle drops — and that you have the guts to stay invested through them. But if you know you need to pay for your wedding in 18 months, an all-stock portfolio that could drop 30-50% during a bear market is probably not the right place for you (unless you’re willing to elope).
... and having a solid financial plan.
Since you can’t know for sure which investments will perform well at what time, the surest way to build wealth is to invest in a bunch of assets that perform well in different economic environments. That way, when one (or more) investment goes down, others are there to prop it up.
Your plan should account for:
Your goals
2. Your time horizon
3. Your comfort with risk
$100
$10
$1
$0.50
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
2020
2025
Arab Oil
Embargo
Oil prices
quadruple
S&P 500
down 43%
U.S.
Inflation
at 13.5%
Dow drops 23%
on Black Monday
Savings and
loan crisis
Iraq invades
Kuwait
Asian
currency
crisis
Russian
financial
crisis
9/11
attacks
Dotcom
crash
Iraq war
begins
Subprime
mortgage
crisis
S&P 500
down 46%
Eurozone
debt crisis
Brexit
COVID-19
Pandemic
Fiscal
cliff
Choose an answer above
Don't …
Don't …
Don't …
Don't …
Don't …
Don't …
Don't …
Don't …
