How to Ready Your Portfolio for an Inevitable Bear Market

Key Points

• Investors are likely to emerge from a bear market in better shape by planning now rather than later.

• Creating a plan for multiple scenarios helps you stay calm and avoid reactive decisions.

• Avoid moving your entire portfolio to cash; instead, position yourself to purchase discounted stocks.

Investors have experienced relatively calm markets in recent years, with the 2022 decline being the most notable recent bear market. That episode was an orderly correction that gave way to a strong artificial‑intelligence‑driven bull run.

The COVID‑19 pandemic triggered a sharp drop in the S&P 500, but the index rebounded quickly after massive fiscal stimulus. A brief bear‑market dip in late 2018 shaved about 20% off the S&P 500, yet the market fully recovered by spring 2019.

The next significant bear market will likely arrive eventually, perhaps within a year or possibly a decade. Historical patterns suggest that market cycles tend to complete over time.

Image source: Getty Images.

Attempting to time the market—whether by selling before a downturn or buying at the bottom—requires perfect foresight. In practice, market‑timing strategies rarely deliver consistent returns for investors.

Here are four practical steps you can take now to strengthen your portfolio before a bear market arrives.

1. Keep Your Portfolio Diversified Instead of Dumping Everything Into Cash

When volatility rises, many investors feel pressured to choose between staying fully invested or retreating to cash. In reality, portfolio adjustments work best as incremental tweaks rather than wholesale shifts.

For example, moving some assets from a technology ETF to a low‑volatility fund, or from a growth‑oriented ETF to a dividend‑focused one, adds a defensive layer while preserving long‑term allocation goals. An abrupt plunge to cash can lock in losses and cause you to miss the early stages of market recovery, often doing more harm than good.

2. Assess Your Emotional Tolerance for Large Drawdowns

With the S&P 500 near record highs, it is wise to consider how you would react to a 20%+ decline. Investors often act emotionally during a downturn, but pre‑planning can reveal true risk tolerance.

Ask yourself how you would feel if a 401(k) lost $100,000. Many feel comfortable with risk while markets are rising, but the real test emerges when prices start to fall. If the thought of substantial losses causes anxiety, take steps now—such as adjusting asset allocation—before a correction hits.

3. Build a Cash Cushion to Avoid Forced Sales

Bear markets frequently coincide with economic slowdowns or recessions. Job insecurity combined with a falling portfolio creates pressure to sell investments to cover expenses.

Establishing an emergency fund invested in Treasury bills or another low‑risk vehicle provides a safety net. Having liquid reserves now prevents the need to liquidate long‑term holdings during a market low.

4. Keep Investing Regularly to Acquire Shares at Lower Prices

Warren Buffett treats market corrections as buying opportunities rather than reasons for panic. Over the decades, he has used downturns to acquire quality businesses at discounted prices, enhancing long‑term portfolio performance.

If your financial situation remains stable during a bear market, continue your automatic contributions to retirement accounts and other investment vehicles. Consistent investing lets you purchase more shares at lower prices, which can boost returns once the market rebounds.

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