How To Adjust Your Stock Strategy In A Bear Market

Are your investments taking a hit as the market heads south?

When prices drop and gloomy headlines dominate, it’s natural to feel uneasy. But a bear market isn’t only about losses—it can be a turning point. With the right approach, you can protect your assets, spot new opportunities, and position yourself for the next upswing. Here’s how you can adjust your strategy, stay focused, and make the most of a challenging market environment.

What Is Bear Market

A bear market happens when stock prices drop 20% or more from recent highs and stay down for a while. These periods are often linked to slowing economies, rising interest rates, or global crises. History shows they don’t last forever, but they can test even the most patient investors.

For example, the 2008 financial crisis saw the S&P 500 fall by over 50%, yet the market recovered in the years that followed. Those who adjusted their strategies and stayed disciplined often came out stronger.

Step One: Revisit Your Financial Goals

Before making big changes, look at where you are and what you want to achieve. Ask yourself:

• Are my investments meant for the next few years or the next few decades?
• Can I afford to wait for the market to recover?

If you’re investing for long-term goals like retirement in 20 years, a bear market may be a bump in the road. But if you’ll need the money soon, you might want to move part of your portfolio into safer assets.

Example: Someone saving for a home purchase next year might shift some investments into cash or short-term bonds to avoid market swings.

Step Two: Review And Adjust Your Portfolio

Bear markets often reveal where your portfolio is most vulnerable. This is the time to check your asset allocation—the balance between stocks, bonds, and other investments.

If stocks now make up more of your portfolio than you intended because bonds fell less, you might want to rebalance. Rebalancing can mean selling certain holdings and buying others to bring your mix back in line with your goals.

Case In Point: A portfolio set to be 60% stocks and 40% bonds might drift to 70% stocks during a prolonged rally. If a bear market hits, that extra stock exposure can increase losses. Adjusting back to the original ratio can reduce risk.

Step Three: Focus On Quality Investments

In tough times, quality counts. Look for companies with:

• Strong balance sheets
• Steady cash flow
• Competitive advantages in their industry

These businesses tend to weather downturns better than those with high debt or unstable earnings. Blue-chip stocks, dividend-paying companies, and sectors like utilities or healthcare often hold up better when the economy slows.

Example: During the 2020 COVID-19 downturn, consumer staples companies—those selling everyday goods—saw less volatility compared to travel and hospitality stocks.

Step Four: Keep Some Cash Ready

While it may feel counterintuitive, holding cash in a bear market gives you flexibility. You can use it to cover living expenses without selling investments at a loss, or to buy stocks when prices are low.

Think of it as dry powder—ready to deploy when you spot value. Many legendary investors, like Warren Buffett, have used bear markets as opportunities to pick up quality assets at discounted prices.

Step Five: Continue Investing If You Can

If your financial situation allows, keep contributing to your investment accounts. This strategy, known as dollar-cost averaging, means you buy more shares when prices are low and fewer when prices are high. Over time, this can reduce your average purchase price.

Example: Contributing $500 monthly to an index fund in a bear market lets you buy more shares at cheaper prices. When the market recovers, those shares could grow in value faster.

Step Six: Watch Your Emotions

One of the hardest parts of a bear market is resisting the urge to panic-sell. Fear can push investors to lock in losses, missing the eventual rebound.

Having a plan—and sticking to it—can help you avoid rash decisions. Remember, market recoveries often begin when sentiment is still negative. Those who wait for “clear signs” may miss the strongest gains, which often happen early in the recovery.

Real-World Example: After the 2008 crash, many investors stayed out of the market for years, missing a long bull run that began in 2009.

Step Seven: Consider Defensive Sectors And Diversification

In uncertain times, it can help to tilt your portfolio toward defensive sectors—industries that tend to be less sensitive to economic cycles. These include healthcare, utilities, and consumer staples.

Diversification is equally important. Spreading investments across different asset classes, regions, and industries can reduce the impact of a downturn in any one area.

Illustration: If technology stocks are struggling but energy stocks are holding up, a diversified portfolio can soften the blow.

Step Eight: Use Losses To Your Advantage

If you have taxable investment accounts, bear markets can be an opportunity for tax-loss harvesting. This involves selling investments at a loss to offset gains from other investments, reducing your tax bill.

Just be aware of rules like the IRS “wash-sale” rule in the U.S., which prevents claiming a loss if you buy a substantially identical investment within 30 days.

Step Nine: Stay Informed But Avoid Overreacting

Keeping up with market news can help you understand what’s driving prices, but checking your portfolio every hour can cause unnecessary stress and lead to impulsive mistakes. Set a schedule to review your investments—perhaps monthly—so you can make decisions based on trends rather than daily swings and emotional reactions.

Staying The Course In Challenging Times

Bear markets can test patience and discipline. But they can also be a chance to strengthen your strategy, focus on quality, and prepare for future growth. The key is balancing caution with opportunity—protecting your assets while positioning yourself to benefit when the market turns upward, building resilience and confidence that will serve you well through future downturns and market recoveries over the years ahead.