Recently, I’ve been pondering a question: many people fear a bear market, but in fact, the real test of investment skill is during this period.

First, let’s clarify what a bear market is. Simply put, when stock prices fall more than 20% from their highs, we say the market has entered a bear phase. This is different from short-term market corrections, which are just 10 to 20% pullbacks, short in duration and frequent. But a bear market is a systemic, long-term decline, lasting at least several months, sometimes years, with significant psychological and asset allocation impacts.

Looking at historical data, the S&P 500 has experienced 19 bear markets over its 140-year history, with an average decline of 37.3% and an average duration of about 289 days. But there are exceptions. The COVID-19 panic in 2020 caused a bear market that lasted only a month, as central banks worldwide quickly intervened with QE to stabilize the markets. In contrast, the 2008 financial crisis was much worse, with a decline of 53.4% from October 2007 to March 2009, taking four years to recover to the 2007 highs.

There are usually a few signals indicating a bear market is coming. First is a collapse in market confidence—people start hoarding cash, cut back on spending, and companies begin layoffs and salary cuts, leading to a stock market crash. Second is asset bubbles that become excessively inflated, with prices far from fundamentals; once investors start fleeing, a stampede ensues. External shocks also play a role, such as geopolitical risks, shifts in central bank policies, or black swan events like pandemics.

Thinking back to the bear market in 2022, the root cause was the global central banks’ frantic money printing after the pandemic, causing inflation to soar. Coupled with the Russia-Ukraine war pushing energy and food prices higher, the Fed was forced to raise interest rates sharply and shrink its balance sheet. Market confidence collapsed instantly, and the tech stocks that had surged in the previous two years plummeted the hardest. Looking further back, every major downturn—like the dot-com bubble in 2000, Black Monday in 1987, or the 1973 oil crisis—had different triggers, but all resulted in systemic crashes.

So, how should one invest when a bear market hits? I see three levels:

First, the most conservative: reduce risk, keep sufficient cash on hand, and avoid high leverage. During this time, steer clear of assets with very high price-to-book ratios, because stocks that soared in the bull market tend to fall just as sharply in the bear.

Second, slightly more aggressive: look for sectors that are relatively resilient, such as healthcare, which are less affected by economic cycles. Or find fundamentally sound stocks that have fallen sharply but still have good prospects—if they have enough competitive moat to survive more than three years, they should rebound when the economy recovers. If you don’t want to pick individual stocks, buying broad market ETFs is also fine, since markets will eventually recover.

Third, active trading: since bear markets have a high probability of decline, consider using short-selling tools to find opportunities. Derivatives like CFDs are suitable—they allow you to profit from falling markets, but risk management is essential.

A reminder: bear markets often have rebounds, but don’t be fooled. A bear market rally is a short-term increase of over 5%, which can mislead people into thinking a bull market is starting. The real signal of a transition is when stock prices rise more than 20%, indicating the bear has exited, or when technical indicators show that 90% of stocks are above their 10-day moving average.

Ultimately, a bear market isn’t scary; what’s dangerous is unpreparedness. As long as you can identify the start of a bear market early, use appropriate tools to respond, and have patience, both bulls and bears can profit. The key is strict discipline in stop-loss and take-profit orders to protect your capital. Adjust your mindset, seize opportunities, and a bear market might just be the best time to position for future gains.