Five strategies to invest profitably during a bear market

Bear markets are part of the investment cycle, seasoned investors have a few strategies to deal with it. In this guide we look at how to make money in a bear market, the best trading accounts to use, how far markets can fall and what a bear market is.

1. Be overweight cash gradually (and wait for opportunities)

When stock markets are booming, build up a cash buffer. In a bear market, cash is king. It gives investors the most flexibility in buying stocks at the most favourable prices. For example in 2024, Warren Buffett sold a lot of Berkshire Hathaway’s (US:BRK.A) equity holdings and built up a mammoth $300 billion war chest. This gives hime plenty of firepower to deploy should prices drop further from here.

2. Buy in ‘deeply-oversold’ conditions

When panic strikes markets, do not be afraid to buy some stocks. In a bear market, prices can plunge suddenly and overshoot to the downside. The cascade of bearish catalysts lead to panicked selling. This opens up favourable conditions for long-term entries.

3. ‘Know what you own and why you own it’

Have a targeted buy list before hand. This group of stocks should be on your closely-monitored watchlist. Plunging prices could open up buy opportunities with favourable risk-reward. Note these companies should be quality companies – not crazily overhyped ‘stonks’. Of course, if you know a lot about certain sectors, low prices and knowledge could be an ‘edge’ for you to maximise the odds of winning. In addition, having an edge gives investors the courage to hold a stock during a market setback.

4. Look for new leaders

Every bull cycle brings out new stock leaders. For example, many high-flying Nifty-Fifty stocks collapsed during the 1974 bear market and never recovered. Many dot-com stocks that went ballistic in the late nineties but were liquidated in the subsequent bear market. The seeds of the next bull market are often sowed during a bear market. The key question is: How do we detect new cycle leaders? Relative strength (see GMG Guide on Relative Strength). Remember Tesla’s (TSLA) stunning advance in 2020 when the world was still mired in the pandemic? That’s relative strength. Tesla’s share prices broke new all-time highs in June 2020 and then promptly rose 5x in six months! Always look for potential new leaders in the next bull market.

5. Hold some safe-haven assets like gold and government bonds

Government bonds tend to go up during a bear market as central banks cut rates. Gold is another favourite. But this metal has been appreciating for quite some time and this makes it vulnerable to a correction. Use ETFs to hold these macro positions.

How to make money during a bear market

Market downturns can be opportunities for astute traders. As prices head south, there are trading vehicles that allow short-term bearish positioning.

Below are three ways traders can bet on falling prices:

1. Shorting with CFDs and spread bets – This is very common for traders to wager bearish views on specific instrument. For example, if a trader is negative on the FTSE 100 Index due to contagion fears, he/she places short bets with firms that offers CFD facilities. (see GMG CFD Guide here). Below is a comparison of CFDs with, say, futures contracts. Depending on contracts, CFDs bets may have expiry dates. Also, the leverage-ness of each asset may differ.

Feature	CFDs	Physical Investing	Exchange Traded Futures	Spread Bets
Leveraged Trading	Yes	No	Yes	Yes
Flexible Trade Sizes	Yes	Yes	No	Yes
Fixed Expiry Dates	No	No	Yes	Varies
Trade Long or Short	Yes	No	Yes	Yes
Finance charges	Yes	No	No	Varies
Good for Short Term Trading	Yes	Varies	Yes	Yes
Good for Long Term Trading	No	Yes	Yes	No
Confers Ownership of the Underlying	No	Yes	Yes	No

2. Buying Put options (or selling calls) – Alternatively, traders may buy put options to bet on falling markets (see GMG’s fantastic Option Guide here). Put options, unlike call, are derivatives that confer to buyers a time-limited right to sell an asset (‘underlying’) at a fixed price (‘strike’). If prices keep falling, this right becomes more valuable since holders are able to sell at the higher price. Of course, if at expiry the underlying asset has advanced above the strike price, the option expires worthless. To acquire this right, traders would have to pay a premium. When volatility spikes, these premiums rise (holding all other factors constant). Timing is of the essence when buying puts.

3. Buying Inverse ETFs – is another method to trade on negative trends. For example ProShares UltraShort QQQ (ticker: SQQQ, factsheet here) moves inversely to the Nasdaq market. Not only that, it moves 3x the underlying asset. In other words, it gives traders ‘more bang for the buck’. Like buying put options, timing is important here. These inverse ETFs – along with volatility ETFs like VXX – drop severely during a bull run (see right). So you might want to sell out once a position hits decent profits.

Compare accounts for bear market trading

Trading Platform	Markets Available	Account Types	Customer Reviews	More Info
	13,500	✔️CFD ✔️Spreadbet ❌Futures ✔️Options ❌DMA	3.8 (Based on 124 reviews)	See Platform 70% of retail investor accounts lose money
	5,000	✔️CFD ✔️Spreadbet ❌Futures ✔️Options ❌DMA	4.1 (Based on 16 reviews)	See Platform 75% of retail investor accounts lose money
	1,200	✔️CFD ✔️Spreadbet ❌Futures ❌Options ❌DMA	4.6 (Based on 86 reviews)	See Platform 75.3% of retail investor accounts lose money
	2,000	✔️CFD ❌Spreadbet ✔️Futures ❌Options ❌DMA	3.7 (Based on 144 reviews)	See Platform* 80% of retail investor accounts lose money
	10,000	✔️CFD ✔️Spreadbet ❌Futures ✔️Options ❌DMA	4.3 (Based on 257 reviews)	See Platform 64% of retail investor accounts lose money
	17,000	✔️CFD ✔️Spreadbet ✔️Futures ✔️Options ✔️DMA	3.9 (Based on 678 reviews)	See Platform 69% of retail investor accounts lose money
	12,000	✔️CFD ✔️Spreadbet ❌Futures ✔️Options ❌DMA	3.7 (Based on 148 reviews)	See Platform 70% of retail investor accounts lose money
	9,000	✔️CFD ❌Spreadbet ✔️Futures ✔️Options ✔️DMA	3.6 (Based on 73 reviews)	See Platform 65% of retail investor accounts lose money
	7,000	✔️CFD ❌Spreadbet ✔️Futures ✔️Options ✔️DMA	4.4 (Based on 934 reviews)	See Platform 60% of retail investor accounts lose money
	2,976	✔️CFD ❌Spreadbet ❌Futures ❌Options ❌DMA	3.4 (Based on 277 reviews)	See Platform 51% of retail investor accounts lose money
	2,100	✔️CFD ❌Spreadbet ❌Futures ❌Options ❌DMA	4.6 (Based on 136 reviews)	See Platform 75% of retail investor accounts lose money

What is a bear market?

Assets prices are full of randomness. Seldom do stock prices move in a straight line, be it up or down. When most stocks rally for a period of time, it is called a “bull market”. When market prices drop, we call this a “bear market”.

How much should prices drop before we recognise the market has slipped into a bear market? 20 percent from its recent highs, by general definition. The last equity bear market crash in the US happened back in 2022. That general decline was caused by surging interest and inflation rates, bubbly valuation and the Ukraine conflict.

When a market is in a “correction”, it is defined as a 10 percent drop from its near-term peak.

Historically, corrections were more common than a full-fledged bear market. This is logical. A bear market is driven strongly by persistent macro forces such as a recession, while a correction occurs due to some market adjustments, such as near-term overbought forth or temporary economic uncertainties.

S&P’s long-term chart below reveals these bear markets (red shades) and corrections (blue shades) since 2008.

Source: yardeni.com

How much do stock prices go down in bear markets?

Quite a fair bit. Bear markets are not a pleasant time to be in the stock market. Week after week, prices test the lows. Just when you thought the downtrend is over, stocks lurch south.

By some calculations, the average bear market decline is about 37 percent from their peaks. In recent years, the deepest and most painful correction was the 2008 Global Financial Crisis. Prices collapsed by more than 50 percent as investors panicked about bank failures and the viability of the financial system.

In comparison, the bear market in 2022 was a relatively shallow one. The S&P 500 only lost a quarter of its value and it lasted only a year (see below).

Note the regularity of bear markets. It happened once every few years. The longest period without a bear market was during the nineties. But that was a highly unusual (and profitable) time!

Source: yardeni.com

Final Remarks on Shorting Markets in 2025

When shorting markets, risk management is an absolute must. Why? Because the lowest boundary for a stock is zero. But a stock rebound can – theoretically – advance to ‘unbelievably’ high levels over a short time.

Shorting is thus a risky activity, especially in the era of Trump. One single tweet from the White House can instantly cause stock prices to spike, thus sinking many trading short positions.

As such, don’t chase the market lower, especially when prices are oversold. Be extra careful if many bets are stacked on the short side. A ‘short squeeze’ may easily happen. This will lead to deep losses on short positions.

Therefore, watch to build long-term portfolios when prices are right since the US stock market tends to go up over time.