Recently, there have been more and more market discussions about bear markets. I’d like to organize some core knowledge about bear markets, which may be helpful for friends who want to find opportunities during a bear market.

First, let’s clarify what a bear market really is. Simply put, when asset prices fall by more than 20% from their highs, it enters a bear market. This applies not only to stocks—bonds, real estate, and cryptocurrencies also fit this definition. A bear market is different from a short-term market correction. Corrections are usually pullbacks of 10–20%, while a bear market is a longer-term, more systemic decline that may last for months or even years.

To judge whether a bear market has truly arrived, there are several clear bear-market signals to pay attention to. First, a stock price decline of 20% or more—this is the most direct definition. Second, historical data shows that bear markets last an average of about 289 days, during which indices typically fall by around 37%. At the same time, bear markets are often accompanied by an economic recession, high unemployment, and central banks launching quantitative easing to rescue the market. Another situation is when current assets have a serious bubble and the market shows irrational investment enthusiasm; central banks tightening liquidity policies can also trigger a phased bear market.

The causes of bear markets are usually not due to a single factor. Loss of market confidence can cause consumers and businesses to hold back, leading to short-term plunges in stock prices. When asset bubbles are excessive, once someone starts withdrawing capital, it can trigger a stampede effect. Major events such as financial institution failures, sovereign debt crises, and war conflicts can also ignite market panic. Tightening monetary policy—such as raising interest rates and reducing the balance sheet—reduces liquidity and suppresses spending. External shocks like natural disasters, pandemics, and energy crises are also common triggers.

Looking at several famous bear markets in history can help you understand these principles. The bear market in 2022 began in January. It was mainly driven by the frantic QE carried out by global central banks after the pandemic, which led to rising inflation, and it coincided with the Russia-Ukraine war pushing up commodity prices. The Federal Reserve was forced to raise interest rates sharply and shrink its balance sheet. The fastest case was during the COVID-19 outbreak in 2020: from mid-February to mid-March took only one month. But global central banks learned lessons from 2008 and implemented QE immediately to stabilize cash flow, quickly resolving the crisis. The 2008 financial crisis was the most severe: the Dow fell from 14164 to 6544, a drop of more than 53%, and it did not return to the 2007 high until 2013. In 2000, during the dot-com bubble, many high-tech companies were hyped despite having no real profits; once investors withdrew, it led to a chain collapse. In 1987’s Black Monday, the Dow plunged 22.62%; program trading intensified the sell-off. The furthest back was the 1973-1974 oil crisis: an OPEC oil embargo caused oil prices to surge, leading to stagflation. The S&P500 accumulated a decline of 48%, and the bear market lasted 21 months.

So how should you invest when a bear market comes? My view is that you need a strategy. First, reduce portfolio risk, keep enough cash, avoid excessive leverage, and reduce the proportion of “overpriced” stocks based on high valuations such as high P/E and other similar metrics—because these tend to rise aggressively in bull markets, but they fall even more in bear markets.

Second, you can look at assets that are relatively resistant to the cycle. For example, healthcare sector stocks, or quality stocks that are oversold but have a competitive moat. These companies must have a sufficiently strong moat to last at least 3 years, so that when the business cycle recovers, they can return to their highs. If you don’t want to pick individual stocks, investing directly in broad-market ETFs is also a good option—when the next round of economic recovery arrives, they will rise accordingly.

Another point is choosing financial instruments suitable for a bear market. Because the probability of declines is high, the success rate of shorting also tends to increase. Derivative tools like contracts for difference (CFDs) are very suitable for finding short opportunities in bear markets, because they allow you to trade various assets, including indices, foreign exchange, futures, stocks, and more, and they do not involve trading physical commodities. Many trading platforms provide demo accounts so investors can practice first and become familiar with the operating process.

You also need to be careful about bear market rebound traps. During bear markets, there can occasionally be upward rebounds lasting a few days or even a few weeks, which can make people mistakenly think a bull market has started. Typically, an increase of more than 5% is considered a rebound. But unless the stock market rises for several consecutive months or increases by more than 20% away from the bear market, it’s still only a rebound. When judging, you can look at whether 90% of stocks are above their 10-day moving average, whether the proportion of advancing stocks exceeds 50%, or whether more than 55% of stocks set new highs within 20 days—these indicators point to the true start of a bull market.

Finally, my takeaway is that bear markets aren’t as scary as they seem. The key is to identify the beginning of the bear market in the first place, and then use reasonable tools and strategies to find opportunities. While protecting assets, investors can use shorting to create profit opportunities for themselves. Adjust your mindset—profits are possible whether you’re going long or going short. For conservative investors, the most important things in a bear market are patience and strict stop-loss/take-profit rules for any investment, so you can truly protect your assets.