Bear Market Investment Strategy: Six Tools and When Each One Fails

A bear market investment strategy is a set of rules you pick before stocks fall 20 percent, not after. The good ones settle three things early. How much to own, what to sell for cash, and what brings you back in.

Most investment strategy in a bear market fails on the third point. Getting out is easy. Getting back in is where the damage happens.

What counts as a bear market?

The usual definition is a 20 percent fall from a recent closing high. The S&P 500 fell 18.9 percent from February 19 to April 8, 2025. That missed the line by a rounding error. It felt the same to clients.

The recent ones look very different from each other.

• 2007 to 2009. The S&P 500 fell 56.8 percent from October 9, 2007 to March 9, 2009. It didn't close at a new high until March 28, 2013.
• 2020. It fell 33.9 percent from February 19 to March 23. That took 23 trading days. It set a new high on August 18, 2020.
• 2022. It fell 25.4 percent from January 3 to October 12. It didn't recover the high until January 19, 2024.

One took five years to heal. One took five months. A strategy that fits one of them can badly miss the others.

Why does the loss size matter so much?

Because recovery math isn't symmetric. A 25 percent loss needs a 33 percent gain to get back to even. A 34 percent loss needs 51 percent. A 57 percent loss needs about 131 percent.

For clients drawing income, it's worse. Selling shares to fund withdrawals near the low locks in the loss. Our sequence of returns risk guide walks through that math with real dates.

What investment strategy works in a bear market?

There isn't one answer. There are six common tools. Each has a cost, and each one works in a different kind of decline.

1. Rebalance into the decline. Hold a fixed mix and buy stocks as they fall. It's simple and it wins in fast, V-shaped recoveries. It hurts in a long slide, because you keep buying for 17 months.
2. Cut exposure by rule. A trend or signal rule moves part of the portfolio to cash when conditions weaken. Trend following is the most common version. It needs time to react, so it does better in slow declines.
3. Scale exposure to volatility. Volatility targeting owns less when markets get jumpy. It reacts fast, but it can stay small through the rebound.
4. Own lower-risk stocks. A low volatility ETF stays invested but tilts toward steadier names. It usually falls less than the market. It still falls.
5. Buy a hedge. Put options, collars and buffer ETFs define the loss in advance. You pay for that with premium or a capped upside, every year, crash or not.
6. Hold a cash reserve for withdrawals. Keep one to two years of income in cash. Then the client never sells stocks at the low to pay bills.

These aren't exclusive. Many advisors pair a cash reserve with one of the other five.

How did these strategies do in 2020 versus 2022?

Take the two most recent bear markets side by side. They reward almost opposite behavior.

2020 was a speed test. The whole decline took 23 trading days. The S&P 500 dropped 12 percent on March 16. It rose 9.4 percent on March 24, the day after the low. A slow trend rule often sold near the bottom and bought back months later, higher. Rebalancing into the fall was the winner. So was doing nothing.

2022 was an endurance test. The decline ran 282 calendar days, with several sharp rallies along the way. Bonds didn't help. The Bloomberg US Aggregate Bond Index lost about 13 percent that year. That was its worst calendar year on record. A 60/40 portfolio had no steady side to rebalance from. Rules that moved to cash had months to act. And cash was one of the few assets that held value.

You won't know which kind of bear market you're in until it's over. So pick the mistake your client can live with.

How does THOR approach a bear market?

THOR's indexes use a systematic, signal-driven rule. Each position can step to cash when its own signal turns negative. It steps back in when the signal turns positive. The rule is set in advance. Nobody overrides it in a panic.

It seeks to reduce drawdowns in long, grinding declines like 2022. It will be slow in a crash like 2020. That trade-off is deliberate. We cover the wider picture in what happens to ETFs when markets crash.

When does a bear market strategy fail?

Every one of them fails somewhere.

• Whipsaw. Signal rules sell on a dip that reverses. Then they buy back higher. In a choppy, sideways year that repeats, and the costs add up.
• V-shaped rebounds. Rules that cut exposure often miss the first leg up. The strongest days tend to sit right next to the worst ones.
• Correlation breaks. Rebalancing assumes bonds rise when stocks fall. In 2022 both fell together.
• Hedge drag. Puts and buffers cost money in the years with no crash. Most years have no crash.
• Behavior. The biggest failure is abandoning the plan near the low. A rule that clients fire at the bottom doesn't work, however good it looks on paper.
• Taxes. Moving to cash in a taxable account can realize gains on the way out.

A bear market also isn't the only risk. Inflation, a flat decade or a sector collapse can hurt a portfolio without ever crossing minus 20 percent.

What should an advisor set up before the next bear market?

• Write the rule into the investment policy statement, including what triggers a return to stocks.
• Match the tool to the client. Income clients need a cash reserve first.
• Show clients the 2020 and 2022 paths now, while markets are calm.
• Decide who can override the rule. The usual answer is nobody.

Bear market strategy: definitions

• Bear market. A decline of 20 percent or more from a recent closing high.
• Drawdown. The fall from a peak to a later trough, as a percentage.
• Recovery time. The time from the trough back to the prior high.
• Whipsaw. A signal that sells, then buys back higher after a false alarm.
• Rebalancing. Trading back to a fixed target mix after markets move.
• Cash reserve. Money set aside to fund withdrawals so stocks aren't sold at a low.
• Buffer ETF. A fund that uses options to absorb a set range of losses in exchange for capped gains.

Past performance is not indicative of future results. Index figures cited above are public market data for illustration only. They are not the holdings or performance of any THOR fund or strategy. This material is not investment advice.