Recently, many people have been discussing bear markets, but not many investors truly understand what a bear market is or how to respond to it. I’d like to share my understanding and some practical strategies.

A bear market is essentially a state where asset prices decline by more than 20% from their highs. This definition seems simple, but the underlying logic needs to be understood. When the market is worried about future economic prospects, consumers tighten their wallets, companies cut back on hiring and expansion, and investors start selling assets. When all three happen simultaneously, stock prices can plummet in the short term. Another situation is when asset bubbles are excessive, and prices are driven so high that no one is willing to buy in, causing a stampede effect that accelerates the decline. Therefore, bear markets are usually triggered by a loss of market confidence and the bursting of price bubbles at the same time.

Looking at the history of the U.S. stock market, bear markets typically fall by an average of over 37%, lasting about 289 days. However, the bear market caused by the COVID-19 pandemic in 2020 lasted only one month, making it the shortest on record. It dropped from the high in February to the low in March, with a decline of over 30%, but the market quickly launched QE to stabilize cash flow, rapidly resolved the crisis, and then experienced two consecutive years of a super bull market.

In contrast, the 2008 financial crisis was much more severe. That bear market started in October 2007 and continued until March 2009, with a decline of 53.4%. What’s more painful is that even after the government launched economic stimulus plans, the bear market did not end immediately. It took more than five years, until March 2013, to recover to the high of 2007. The root cause of this crisis was the housing bubble, where banks packaged high-risk loans into financial products and sold them, layer after layer, ultimately triggering a chain reaction.

The dot-com bubble in 2000 is also a classic case. At that time, high-tech companies went public wildly, many of which had no real profits and relied solely on hype and valuation surges. When investors started pulling out, the stampede effect exploded instantly, ending the longest bull market.

Black Monday in 1987 was even more extreme. On that day, the Dow Jones Industrial Average plunged 22.62%, mainly because algorithmic trading automatically triggered sell-offs during short-term sharp declines, accelerating the fall. However, the government learned from the lessons of the 1929 Great Depression and quickly introduced stabilization measures—cutting interest rates and implementing circuit breakers. Within 1 year and 4 months, the market recovered to its previous high.

Since bear markets are inevitable, the key is how to respond. First, reduce the risk in your investment portfolio. Keep enough cash on hand, avoid excessive leverage, and especially cut down on stocks with high P/E ratios and overhyped valuations. These assets tend to be bubble-prone; what rises sharply in a bull market often falls just as hard in a bear market.

If you still want to find opportunities during a bear market, focus on assets less affected by economic fluctuations, such as healthcare stocks. Another approach is to select fundamentally strong stocks that are oversold but have sustainable competitive advantages. These companies’ moats should last at least three years; otherwise, they may not recover to previous highs when the market rebounds. If you’re unsure about individual stocks, investing in broad market ETFs is a safer choice—waiting for the economy to recover will allow the market to re-enter an upward trend.

Another tool worth paying attention to is short selling during bear markets. In declining markets, the success rate of shorting is indeed higher. You can learn to use derivatives like CFDs to capture these opportunities. However, this requires thorough learning and practice—many platforms offer demo accounts so you can familiarize yourself with the process first.

Finally, bear market rebounds can be misleading. It’s easy to mistake them for the start of a bull market, but that’s not the case. A true bull market reversal requires a rise of over 20% from the bottom or several consecutive months of upward trend. Short-term rebounds lasting only days or weeks are just traps.

In summary, there’s nothing to fear about bear markets. The key is to identify the start of a bear market early, choose appropriate tools and strategies to protect your assets, and look for opportunities. Adjust your mindset, strictly set stop-loss and take-profit points, and remember that both long and short positions can be profitable. For conservative investors, patience and discipline are the most important virtues during a bear market.