A bear market in stocks is generally defined as a 20% drop in value from the peak. On average, bear markets occur about every three years, last for 10 months, and require 2 1/2 years to recover. As we publish this in April 2026, our last bear markets were January-October 2022 (a 27% drop in US stock prices) and February-March 2020 (a 34% drop in US stock prices). A knowledge of financial history arms an investor with the means to control the most important factor in their investment returns and financial security: their own behavior.
After exceptional returns, particularly among US large-growth tech companies, aka artificial intelligence (AI) stocks, for the last three years, many investors are worried about a bubble. While bubbles, and particularly the date they’ll burst, are challenging to identify in advance, we are sure to have another bear market at some point in the future. A wise investor prepares in advance for bear markets and controls their own behavior throughout the bear market to avoid serious financial setbacks.
Preparing for a bear market is critical. Perhaps the most important element is to educate yourself about stock market history in advance, and then incorporate that knowledge into a written investment plan that you can follow in the throes of a bear market. A solid written plan will dictate what you invest in and how you behave during a bear market. Then, all you have to do when the bear market actually occurs is keep your commitment to yourself by following the plan.
A solid investing plan is diversified, both between and within asset classes (or types of investments). For example, my personal long-term asset allocation (mix of investments) dictates that I will have 40% of my money invested in US stocks, 20% in international stocks, 20% in bonds, and 20% in real estate. If US stocks have a bad year, my new investment money will go toward those stocks to bring the portfolio back into balance. If things get really bad, I might even have to sell some of those other assets to buy more US stocks. Although it doesn’t feel very good to buy something that has recently gone down in price, history informs us that these purchases usually have the best long-term returns. Using broadly diversified investments, such as index funds, rather than a few individual stocks, also allows us to have confidence in the eventual recovery of money lost in a bear market.
Additional preparation includes keeping a reasonable amount of money in cash—or, at least, very safe investments. Money you expect to spend in the next few years doesn’t belong in the stock market, much less next quarter’s estimated tax payment or a down payment for an upcoming home purchase.
A good plan not only tells you what to do in a bear market (stay the course, rebalance, continue to invest), it tells you what not to do. It will tell you to avoid changing your asset allocation, panic selling, market timing, stock picking, using actively managed mutual funds, and other activities that have been shown to decrease long-term returns.
Once you are in a bear market, all you have to do is follow your previously written plan. Plenty of investors don’t realize they need a written plan, so a bear market often provides the impetus to do some real financial planning.
Here are some other useful moves you can make in a bear market.
#1 Do Nothing Major
The most important consideration, assuming you have a reasonable mix of diversified investments like index funds, is to make no major changes. “Stay the course!” Jack Bogle, founder of The Vanguard Group Inc., famously said. Some people find it easier to stay the course if they are not frequently reminded about poor performance. They avoid financial news, turning off CNBC and avoiding investment magazines. No long-term investor needs to check their investments every day or even every month, but if you know your plan is reasonable and your portfolio is diversified, you may find it better not to look at investment statements until the bear market is over in a few months—or even a couple of years.
More information here:
Behavioral Finance Lessons from Bear Markets
How to Write an Investment Policy Statement (IPS)
#2 Tax-Loss Harvest
While it’s no fun to lose money, Uncle Sam will share your pain if you have a taxable account. When recently purchased shares of an index fund go down in value during a bear market, you can swap them for shares of a similar but (in the words of the IRS) not “substantially identical” index fund. That's called tax-loss harvesting. Without significantly changing your asset allocation, you have booked a capital loss that you can use against future capital gains and even $3,000 worth of ordinary income each year.
#3 Rebalance the Portfolio
When you set up your portfolio, you choose to take on a reasonable amount of risk, often defined by a ratio of stocks to bonds or other safe investments. In a bear market, that ratio is likely to be significantly changed. It’s time to rebalance the portfolio back to the original ratio, essentially forcing yourself to sell high and buy low.
#4 Evaluate Your Risk Tolerance
Your first bear market or two is a great time to get to know yourself as an investor. Are you lying awake at night worrying about your money? Or are you wishing you could pile even more money into the market and buy shares “on sale?” If it's the former, you might want to decrease your long-term stock-to-bond ratio (after the market recovery, of course). If it's the latter, you might want to increase that ratio—again, after you’ve seen the bear market through.
More information here:
An Appropriate Amount of Investing Risk
Yes, Risk Tolerance Can Be Modified: You Just Have to Rewire Your Brain
# 5 Consider Putting Off Major Purchases
Bear markets are a great time to invest more money, since you can purchase more shares with any given amount of money due to the lower prices. Conversely, bear markets are a rough time to sell shares in order to get more money to spend. This might be a good time to defer a major purchase. This may allow you to pick up shares at a discount, or at least avoid selling them low.
You can learn a lot about yourself in a bear market, but it’s most critical to avoid big mistakes, like panic selling.
How did you respond the last time the US was in a bear market? What is your risk tolerance like? What will you do next time we're in a bear?
[This article was originally published at ACEPNow.]