4 Bear Market Strategies to Consider in Down Markets

By Nick Mango

Date: May 2, 2019

Time is money whenever a bear market strikes; and staying put while reciting the mantra buy-and-hold isn’t much of a safety net at all. In fact, investors who stayed 100% invested in equities and bonds during the most recent bear markets (late 2000 to 2003, and 2007 to 2009) ultimately suffered the full severity of each bear market’s downturn.

For those nearing retirement, and especially investors in the early years of the retirement life cycle, suffering such negative portfolio returns can have devastating consequences! Though millennials and workers in their prime have more time to recover, the stock market losses are just as severe. That’s why it is important to help grow and protect your investments throughout the inevitable bull and bear cycles you’ll encounter along the way by becoming well-versed and proficient with some of today’s more nimble and active bear market strategies.

Our mission today, then, is to identify four (4) such bear market investing strategies that self-directed investors, and even those with IRAs under management, might consider using in down markets. Whether shorting individual stocks, sectors or indices, or using derivatives or option techniques, investors can achieve a number of valuable objectives, everything from growth and income all the way to asset protection and hedging.

4 strategies for a bear market

Active Investing Strategies to Combat Bear Market Conditions

As part of the safety-minded selling and portfolio rebalancing processes, riskier assets like speculative stocks or other growth investments could be offloaded to protect prior gains, guard against losses and bolster the cash component of the portfolio. While going partially to cash (as much as 30%) in bear market conditions is generally considered by the industry to be both prudent and advisable, so too might be investing in a bear market by putting some of that cash to work via one or more of these investing strategies:

  1. Shorting Stocks: While most retirement accounts (401(k) and IRAs) prohibit short selling of equities, playing the down side could be particularly profitable in bear market cycles when most asset prices tend to be falling. Interested investors might use a private brokerage account to put some cash to work in this manner but should only do so once properly educated and fully aware of any risks and regulations that come with trading stocks or other equities.
  2. Buying Inverse ETFs: As with pure short selling, a simple inverse ETF purchase could enable investors to make money when the market falls. However, unlike short selling, the purchase of inverse ETFs is typically permitted for retirement accounts...but not all inverse ETFs qualify. That’s because some inverse ETFs are leveraged two, three or even four times in an effort to increase positive performance in down market conditions. Such ETFs are high-risk assets that utilize margin and, for that reason, they aren’t well-suited nor permissible for 401(k) or IRA accounts. However, for investors looking for positive portfolio results in bear market conditions, a non-leveraged inverse ETF might be well worth investigating.
  3. Using Options: The option market is a vast and perhaps undiscovered universe for many long-term investors. However, option strategies are plentiful, and many have been gaining both notoriety and popularity in this modern era where heightened market volatility is the new normal. So, whether looking to hedge risk or boost growth and/or income in bear market conditions, trading options in a bear market could help investors achieve those objectives. Particularly amidst bear market conditions, investors might opt to learn and employ straightforward option tactics like buying cash-secured puts or selling covered calls; both of which are typically permissible for IRA accounts. Basic puts and calls can be used to generate income, play the short side of individual stocks, market indices and other assets, and are useful for hedging portfolio risk on existing long positions. In total, each broker has established its own rules for option trading in IRA accounts, and many preclude investors from utilizing more complex option techniques beyond the basic cash-secured puts and covered calls.
  4. Selling Futures: Self-directed investors may also opt for selling futures in qualifying IRA accounts. Futures enable access to a variety of markets, sectors and commodities; many of which are harder to reach by way of traditional investments like mutual funds or ETFs. To short an individual market, asset or equity, investors would sell a futures contract(s) for that particular asset and would stand to profit should the asset price drop, as is typical in bear market conditions. Because legal and tax implications are prevalent whenever dealing in futures, options or other derivative products, it’s important for investors to be knowledgeable and properly educated about these products and how to use them.

In conclusion, it’s crucial to note that the bear-market investment strategies outlined in this toolkit must be combined with a proper asset allocation strategy as well. Bonds and equities, after all, might still comprise the largest segments of even a bear proof portfolio—perhaps 30% and 40%, respectively. However, the 10% or so of the portfolio that’s typically allocated toward aggressive or speculative investments may be re-allocated in this way so as to provide a potential layer of growth, income and/or safety despite prevailing bearish market forces.


This content is intended to provide educational information only. This information should not be construed as individual or customized legal, tax, financial or investment services. As each individual's situation is unique, a qualified professional should be consulted before making legal, tax, financial and investment decisions.

The educational information provided in this article does not comprise any course or a part of any course that may be used as an educational credit for any certification purpose and will not prepare any User to be accredited for any licenses in any industry and will not prepare any User to get a job.

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