Bear market investing strategies

This post is about how to invest in a bear market. This post is about how to trade in a bear market.
With the stock market down from its January 2018 highs, some investors and traders are pondering the possibility of a bear market. I still think that this is a bull market. But nevertheless, it’s important to know what the best bear market investing strategies are.
Bear markets are wonderful opportunities for medium-long term investors. The more overvalued a market becomes during a bull market, the greater the market’s long term downside risk. Bear markets cut valuations significantly.

  1. This means that the market becomes much cheaper and a much better long term BUY after a bear market bottoms.
  2. This also means that the market’s long term downside risk is smaller because the market is already undervalued.

So how should medium-long term investors invest in a bear market? Here are some common bear market investing strategies, ranked from worst to best.

  1. You can sit right through a bear market while being 100% long.
  2. You can shift into defensive sectors
  3. You can shift to long term Treasury bonds
  4. You can buy inverse ETFs.
  5. You can shift to 100% cash
  6. You can shift to short term Treasury bonds

Let’s look at each of these investment strategies in detail.

Sit right through a bear market while being 100% long.

Sitting through a bear market while being 100% long is the worst investing strategy ever. Financial services companies and brokers tout this strategy because they need to generate commissions even during bear markets.
Some investors convince themselves that they are “long term investors” who don’t care about bear markets. They convince themselves that “all dips are meant to be bought because the stock market goes up 7-8% over the long run”.
They are lying to themselves. Most of these perma-bulls lose their composure and sell AFTER stocks have already crashed 40% in a bear market. In reality, investors should avoid bear markets like the plague. Can you imagine losing 40% of your entire networth in a little more than 1 year? It would be psychologically devastating. That’s like losing half of what you saved your whole life in the span of 1 year. Meanwhile, bear markets destroy leveraged ETFs, which might lose 90%+ of their value).
Bear markets aren’t rare. They’ve happened 4 times since 1950 and 6 times since 1929. In other words, every generation will see at least 2 bear markets in their life time.
Each of these declines were massive: 40%+. The stock market takes YEARS just to recover to old all-time highs after a bear market. Long term investors who ignore bear markets are underwater during that entire time. Imagine holding a massive loss for 5 years. It’s financially and psychologically devastating.
Here’s the S&P 500 during the 2008 bear market.

And here’s the thing. You cannot blindly trust that a normal bear market will just end. The 1929-1933 bear market saw the S&P 500 and Dow Jones fall more than 80%! The reality is that another 1929-1933 event could happen again. It’s not likely, but it is a possibility. Imagine losing 90%+ of your hard earned money. Many people who lived through the Great Depression said that it felt like 10 years of their lives went missing.

Shift into defensive sectors

The second strategy is to shift into defensive sectors during a bear market. Some investors shift from high growth sectors like tech to defensive sectors like utilities during bear markets. Defensive sectors move less than the S&P 500. This means that if the broad index goes up 1%, defensive sectors might only go up 0.5%. If the broad index goes down 1%, defensive sectors might only go down 0.5%.
Here’s the thinking behind this bear market strategy:

  1. Investors who shift into defensive sectors won’t be sitting on the sidelines if a bear market DOES NOT occur. At least the defensive sector – such as utilities – will go up with the rest of the stock market, even if it doesn’t go up as much as the rest of the stock market. So the investor will still participate in some of the broad stock market’s gains.
  2. On the otherhand, investors who shift into defensive sectors won’t lose as much money as the average investor if a bear market DOES occur. Defensive sectors fall less than the broad index in a bear market.

This strategy doesn’t make much sense. Most investors get killed by bear markets. Investing in defensive sectors during bear markets merely ensures that you don’t get 100% killed. Maybe you’ll only be 70% killed. For example, if the broad market falls -50% and defensive stocks fall -30%, you still lost a LOT of money.
There’s not point in investing on the long side if you truly believe that a bear market is imminent. Remember, you don’t always have “in the market”.

Shift to long term Treasury bonds

Some investors like to shift into long term Treasury bonds when it’s a bear market in equities. This way:

  1. They earn some interest from the bond while they’re holding the bond.
  2. Interest rates usually go down a little during equities bear markets. This means that the investor is earnings a capital gains when he/she sells the bond at the bottom of the equities bear market.

This strategy works most of the time, but not always. Sometimes interest rates RISE during an equities bear market and economic recession. For example, the 10 year Treasury yield went up during the 1969-1970 and 1973-1974 bear markets, so bond market investors would have lost money. The 10 year yield went down during the 2000-2002 and 2007-2009 bear markets, so bond market investors would have made money.

Buy inverse ETFs

The third bear market investing strategy is to buy inverse ETFs.
Some investors buy inverse ETFs during bear markets, hoping to profit from the market’s decline. This is a good idea, but only if you have an extremely accurate method of catching the bull market’s exact top and the bear market’s exact bottom.
Other investors try to amplify these profits by buying leveraged inverse ETFs. This is not a good idea. Inverse ETFs are meant to be traded. They are not meant to be held as long term positions during bear markets because leveraged ETFs have erosion problems.
ETF erosion is generally a bigger problem during bear markets than in bull markets. This means that erosion can have a detrimental impact on leveraged inverse ETFs during bear markets.
Let’s use XLF and SKF as examples. XLF is the financial sector’s long ETF. This ETF does not have leverage. SKF is the financial sectors 2x inverse ETF. It is a leveraged ETF.
XLF made a new low from October 2008 to March 2009.

An inverse ETF that matched XLF should have made a new high from October 2008 to March 2009. SKF didn’t make a new high from October 2008 to March 2009. This is due to ETF erosion.

Shift to 100% cash

A good bear market investing strategy is to shift to 100% cash. You don’t always have to hold a position. Sitting on 100% cash and making $0 IS MAKING MONEY when everyone around you is losing money during a bear market. Becoming richer/poorer is a relative term. If other investors’ portfolios are down -30% and you’re flat, you are beating the average and index!
This bear market strategy is simple. Shift to 100% cash when you expect a bear market to start. Shift back to 100% long only when you think that the bear market is over and that a new bull market is about to begin.

Shift to short term Treasury bonds

The best bear market strategy is one that I might use during the next bear market. Bear markets usually last at least 1-2 years. This means that you can:

  1. Sell all your stocks when you think an equities bear market is imminent.
  2. Shift to 100% long short duration Treasury bonds, such as the 2 year Treasury bond.
  3. Earn money from the interest on those bonds.
  4. Once the bond matures, use the proceeds and wait for the bottom of the bear market.
  5. Shift back to 100% long at the bottom of the bear market.

The ONLY risk with this is the very small possibility of a U.S. government default.


So there you have it. These are 6 common bear market investing strategies. Out of these 6 strategies, I recommend that you either shift to 100% cash or buy short term Treasuries.

6 comments add yours

  1. All this bear market talk is frankly scaring me! I have been long 3x ETFs since Feb 8

    • Well in that case you’re probably in the green Ahmad.
      The purpose of this article is merely to develop a strategy for the next bear market.

  2. Hello,
    Could you please give more inside of why not short SPY or any other ETF while in the bear market? Or just open position on SQQQ, SH, SPXS?

    • Shorting an ETF or stock outright is very dangerous. If you don’t catch the top precisely, you will face a margin call. You can’t hold a short position until you’re right.

  3. Hi,
    Thanks for the consistently good website. I have a few questions.
    1. The small possibility of a US default – does that not also make your USD worthless, in the 100% cash option? Has this ever happened?
    2. Why have you created this website? Are you making any money off of it and what is your end goal with it?
    3. What happens if your timing model is off/wrong and the next big recession doesn’t produce a bear market? Do bear markets and recessions always come in tandems?

    • 1. It won’t make the USD worthless – the value of the USD will drop. But the possibility of a US default is just as high as a EU default or Japan default. In other words, if the US does default, it’ll probably happen in sync with other countries. So the USD won’t crash relative to other currencies.
      2. Goal of this website is to basically share what I’ve learned over the past decade from trading. I might want to grow it into a CNBC competitor one day? I’m not really sure. Mainstream financial media is just people “guessing” which way the market will go. Not a lot of data-driven analysis.
      3. Recessions don’t always = bear markets. Sometimes recessions = significant corrections. There is a way to predict which will happen. It’s not a blind prediction.

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