How to Prepare for Bear Markets | 11 Steps [Video, Chart]

how to prepare for bear markets

Bear markets are a fact of life for stock market investors but they don’t have to be detrimental to your net worth.  

After investing through several bear markets, both alone and with financial advisors, I’ll share how to prepare for bear markets. 

While I’m an AFC® (Accredited Financial Counselor), I write from my own investing experience of 40 years, and I do not manage wealth for others.   

After investing through 4 bear markets (I’m old?), I finally figured out how to prepare for bear markets with the following 11 steps.  

Do You Need to Prepare for the Next Bear Market? 

Let me first explain that if you have several decades to save, or are very wealthy, you may choose not to prepare for bear markets 

There is nothing wrong with this. You can simply ride out the bear markets like most stock investors do, especially if you have some of your retirement savings in U.S. Treasury bonds, or some type of guaranteed annuity.  

But if you want to be a little more proactive, plan to retire soonor want to lower risk while building wealth off the bottom of the bear market, you’ll want to be prepared for the next bear market, so keep reading.

Accept Bear Markets

The first step is acceptance. For some insane reason, we think bad things won’t really happen.   Bear markets are a fact of life for stock market investors. Accept that they will happen. On average, bear markets have occurred about every 3 and a half years.  

For example, in the 2000s decade, investors had only recently stopped lamenting the nasty tech bust bear market that ended in 2002 when another bear began about 5 years later in 2007!   

In the bear market of 2002, the popular NASDAQ index dropped over 60%! And the S&P 500 dropped over 49%!   

And in the 2007 bear market, the S&P 500 index dropped by over 56%! These weren’t minor bear markets like we saw in December 2018, which barely qualified as a bear market with a minor drop of only 20%. (Sorry, I couldn’t resist the pun.) 

But bear markets happen. When we accept that something will happen again, whether it’s an earthquake in California, a hurricane in Floridaor a bear market, then we can prepare for it with conscious and unemotional decisions.

Unlike hurricanes and earthquakes, we can actually benefit when we prepare for bear markets! The excellent bull and bear market chart from Invesco below illustrates this well.   chart for bear market preparation

Estimate Stock Market Risk 

It feels like you cannot possibly know how much risk you have from your stock investments, making it feel like it’s impossible to prepare for the next bear market.  

Most investors don’t realize you can estimate your risk from a bear market. To do this now, follow the 5 steps in the Stock Drop Factor process I created and explained in my post and video How Will a Stock Market Crash Affect You? 

While you can’t know exactly how much your stocks will drop in the next bear market, you can get a reasonable estimate. Having this estimate takes away a lot of the stress since once you know your risk, you can prepare for the next bear market based on your own situation.  

If you don’t know your situation, well you can’t really take the next step. 

Choose Your Risk

After logically estimating how much risk you have from the stock market, you can change the amount of risk you have. While it doesn’t feel like it, you can actually choose your investment risk level at any given time in your life.

How cool is that? Goodbye stock market victim-hood! Feel the difference? 

Read my related post How to Rewire Your Brain for Success 

Diversify into Assets That Go UP in Bear Markets  

Some assets move in the opposite direction of the U.S. stock marketsThese are called non-correlated assets.   This is a core principle in the predominant investing method that is used today and is based on “asset allocation 

With asset allocation, based on your age and risk “tolerance”, set percentage is invested into stocks, and a percentage of your savings go into U.S. Treasury bonds. Sometimes other assets are invested in, too 

This is because U.S. Treasury bonds almost always move up during bear markets. You can read more about that in my post What Goes Up When Stocks Go Down 

Are Dividend Stocks Safe? 

Often, investors feel they have little stock market risk because they are in “safe” dividend stocks but dividend stocks fall in bear markets, too.

I write more about this in my post How to Manage Risk in the Stock Market.  

Note that dividend stocks do hold up better than growth type stocks during bear markets as I explain in my post Is Dividend Investing Worth It 

Think Outside the Box  

Nowadays, most investors are invested only in stocks and bonds. This is the prevailing way of investing. It follows mainstream thinking.

In general, a lot of people tend to think that the stock market will make them wealthy, like Warren Buffett. I recently read a popular article that showed valid data to support investors would have been better off investing only in the S&P 500 with no other assets.   

Well, this is very true after a 10 years bull market in stocks during a growing economy. What about other decades? That article is using recency bias.

This is a “financial behavioral” term that makes us think what happened lately will continue to happen, even though we know it won’t, just like the before mentioned hurricanes in Florida.  

And we all want to think we can plop money into a cheap Vanguard S&P 500 fund and get super wealthy from that investment that took 5 minutes to make.  

Most people want easy and simple. And this is what is promoted to the investing public about 95% of the time.   But sometimes it pays to think and invest outside the box, especially when it comes to bear markets.

This is one of the least popular topics among financial advisors unless they happen to be tactical as some are.  

Oil and Gold Investments 

Historical data shows that gold and oil often go up during bear markets as I explain more in my post Stocks That Went Up in 2008 

In fact, the smartest wealth managers and investors actively invest in alternative assets such as gold, oil and small businesses.

Wealthy individuals and investors demand a more sophisticated approach than buying a stock fund or a group of stocks that simply mimic the index but at a higher cost based on a standard asset allocation.   

Beyond paper assets like oil and gold ETF’s, you can also take it a step further by diversifying into small business by buying or starting your own business. 

Starting an online business is my favorite method due to the almost zero capital needed to start and the opportunity it still presents.  

Small Business Investments 

Or you can invest in small businesses through online platforms or through funds if you prefer passive small business investing 

While many small businesses are especially susceptible to recessions, which usually accompany bear markets, many aren’t.  

I can’t resist adding that with small business ownership (vs funds), you can also significantly increase your income.  

And this is one of the best ways to changeprotect and continue your wealth progression.    You can read my related post Start a Business or Invest in Stocks for more on this.  

Increase Cash 

Increasing cash is the easiest way to prepare for a bear market but you’ll need to take some of the other steps here first.

I have written extensively about your cash portfolio allocation in this post What Percentage of Cash Should Be in My Portfolio  

Be Aware of Trends

By staying aware of economic trends and stock market cycles, you can have a much better feel for when to prepare for a bear market. 

While a bear market can happen at any time, the odds a bear market would happen again in 2010 were significantly less right after the economy started growing again.  

It just felt like a bear market would start again due to all the fear from the bear market that ended in March 2009.  

In early 2009, smart investors were using logic and data to buy quality stocks that cost 50% less than they did only 20 months earlier.   

You can read more about this in my post How to Build Wealth. This isn’t about becoming a day trader; it’s about having an awareness about very long term trends and cycles that give you insight about the probability of a bear market at a given time 

This awareness lays the foundation for when to prepare for the next bear market. Here is a video I did on trend awareness.  


You can read more about this at my related post How to Increase Net Worth before Retirement and How to Know If the Stock market Will Go Up or Down. 

Set Stop Losses 

You can set stop losses for most of your investments to be sold when they fall by a certain percentage. You can do this, or you can work with your financial advisor to do this if he hasn’t already. 

Stop losses can be a little tricky since you can get whipped around if the market goes straight back up after your stop loss order executes. It’s all a trade-off.

But stop loss orders can be highly effective in lowering stock market risk.  As the name implies, they stop losses. I hear less about them nowadays in this time and long term buy and hold investing. They used to be more common it seems.      

Create a Wealth Plan

Practice ongoing financial preparedness by living from a personal wealth plan that you make based on what you want in your life, period.

To do any of the things presented here, you’ll want to keep your net worth updated so you can reduce stock market risk if and when appropriate 

Invest with Facts, Data and Math 

When you invest with facts, data and math you invest logically and not emotionally. There are a lot of facts you can use to know more about when and why bear markets happen.   This information can help you know how to prepare for bear markets. 

Bear markets have always presented opportunities for prepared investors to buy assets at low valuations.   This gives investors an opportunity to build wealth off the bottom of bear markets.   Read my related post How to Know If Stocks Will Go Up for more on this.  

Refuse to Be a Victim

We are usually our own worst enemies, especially when it comes to money. This is because money is emotional.   I get that this doesn’t make sense, but money provides food and shelter. 

Plus, having or making money substantiates confidence in our society. Where there are emotions, there is the potential to be a victim. And it’s easy to feel like a victim to the stock market.

I’ve been there and done that. But by taking a few of the above steps, you are annihilating victim-hood because you’re squarely moving from the passenger seat to the driver’s seat with every step you take to prepare for the next bear market 

How to Prepare for Bear Markets Summary 

Now you have 11 steps to prepare for bear markets.   The reality is that bear markets present incredible opportunities to buy quality assets cheap.

By taking advantage of this from a place of preparedness, you can build wealth off the bottoms of bear markets. In other words, there is huge opportunity in being prepared for bear markets beyond simply peace of mind.    

The best place to start is with my Ultimate Wealth Plan. You can get it here now.

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The information on this website is for education only and is not to be construed as personal financial advice.