By Harry Prabandham · Updated September 28, 2026
Investing & Markets
Bear Markets: What They Are and How Investors Can Prepare
A bear market is commonly defined as a 20% or greater drop from a recent high. Preparation, liquidity, and a rebalancing plan matter more than predictions.
Bear Markets: What They Are and How Investors Can Prepare
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What is a bear market?
- A bear market is commonly defined as a decline of 20% or more in a broad stock index from its recent high.
- A correction usually refers to a smaller decline, often 10% to 20%.
- Bear markets vary widely in depth and length, and no one can reliably predict when one will start or end.
- Past U.S. bear markets have eventually been followed by recoveries, but the timing has varied greatly and future results may differ.
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Full Guide
What is a bear market?
- A bear market is commonly defined as a decline of 20% or more in a broad stock index from its recent high.
- A correction usually refers to a smaller decline, often 10% to 20%.
- Bear markets vary widely in depth and length, and no one can reliably predict when one will start or end.
- Past U.S. bear markets have eventually been followed by recoveries, but the timing has varied greatly and future results may differ.
How is a recession different from a bear market?
- A recession is a significant, widespread decline in economic activity; in the U.S., the NBER's dating committee identifies its start and end.
- A bear market is a decline in stock prices, and the two often, but not always, overlap.
- Stock prices look ahead, so markets can fall before a recession is recognized and rise before it ends.
- Waiting for economic data to improve before reinvesting can mean missing part of a market recovery.
What mistakes are common during a bear market?
- Selling everything to cash turns a paper loss into a realized one and requires a second correct call to get back in.
- Stopping regular retirement contributions means buying fewer shares when prices are lower.
- Making large allocation changes in response to headlines can leave a portfolio misaligned with its goals.
- Borrowing to buy more can magnify losses if prices keep falling.
What actions do investors consider during a downturn?
- Rebalancing back to target allocation means trimming what held up better and adding to what fell.
- Tax-loss harvesting can realize losses to offset gains, subject to the wash-sale rule.
- Lower prices can make Roth conversions or gifts of shares worth reviewing with a CPA.
- Confirming that near-term spending is covered by cash or short-term bonds reduces pressure to sell stocks at low prices.
Who faces the most risk in a bear market?
- People who need to withdraw money soon, such as new retirees, face sequence-of-returns risk: early losses combined with withdrawals can shorten how long a portfolio lasts.
- Tech employees can see job risk and a large employer-stock position fall at the same time.
- Investors using margin or securities-backed loans can face collateral calls that force sales.
- These risks are easier to address in planning before a downturn than during one.
Key takeaways
- A bear market is a drop of 20% or more from a recent high, and its length and depth are unpredictable.
- Selling to cash requires two correct timing calls and can lock in losses.
- Rebalancing, tax-loss harvesting, and continued contributions are common responses, each with trade-offs.
- Cash reserves and a stress-tested plan reduce the chance of being forced to sell at low prices.
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