How to survive a bear market? Lessons from historical crashes on what investors should know about defensive strategies

In the cycle of the capital markets, bear markets and bull markets are like two sides of a coin. Many investors crave the returns of a bull market but often panic and become disoriented when a bear market arrives. However, true investment experts know how to identify risks and seize opportunities during bear markets.

What exactly is a bear market? How does it differ from a market correction?

A bear market (Bear Market) is defined as a sustained decline of 20% or more from an asset’s high point. This downward trend can last from several months to several years, affecting stocks, bonds, real estate, precious metals, commodities, exchange rates, and even cryptocurrencies.

For example, in 2022, the Dow Jones Industrial Average dropped from a high of 36,952.65 in January to below 29,562.12 in September, ultimately closing at 29,260.81 on the 26th, officially entering a bear market. Conversely, a stock price rising more than 20% from its low is called a bull market.

It is worth noting that there is a fundamental difference between a bear market and a “market correction.” A correction refers to a short-term decline of 10%-20%, occurring frequently and lasting for a short period. A bear market, on the other hand, is a long-term, systemic downturn that has a more profound impact on investor psychology and asset allocation.

Five warning signs of a bear market

1. A decline of over 20% in stock prices is the most direct signal

According to the U.S. Securities and Exchange Commission, when most major indices fall 20% or more within at least two months, the market enters a bear market. This is not just a numerical change but a concrete reflection of a shift in market sentiment.

2. Bear market cycles are predictable

Looking at the historical data of the S&P 500, over 140 years, 19 bear markets have occurred with an average decline of 37.3% and an average duration of 289 days. The experience of the last five bear markets shows that the market typically needs to fall about 38% to bottom out, and it takes several years to fully surpass previous highs. The 2020 pandemic bear market was an exception, lasting only one month before reversing.

3. Economic recession and deteriorating employment data often accompany

Bear markets are usually associated with economic recessions, high unemployment, and falling prices. Central banks tend to initiate quantitative easing to rescue the economy. However, historical experience warns us that the rise before such easing policies are implemented is often just a bear trap, not a true reversal signal.

4. Asset bubbles are a breeding ground for bear markets

Commodity prices fluctuate far beyond their actual values. When the market is in a bubble-building phase with high investment enthusiasm, central banks tighten liquidity to curb inflation, leading to a phased bear market. Conversely, when the economy is just entering expansion, bear markets are rarely seen.

5. Irrational exuberance before investor sentiment collapses

The true start of a bear market often signals a shift from excessive optimism to extreme pessimism in market confidence.

Five major triggers of bear markets

Loss of market confidence — When outlooks are bleak, consumers save more, companies cut hiring and investments, and the capital market becomes pessimistic about profit prospects, leading to a sell-off.

Price bubbles burst — When asset prices reach a tipping point where no one is willing to buy, reversal occurs. The resulting stampede accelerates the decline and destroys market confidence.

Financial or geopolitical risks — Major events like bank failures, sovereign debt crises, or conflicts can trigger panic. Examples include the Russia-Ukraine war pushing energy costs higher and U.S.-China trade frictions hurting corporate profits.

Sharp shifts in monetary policy — Central banks raising interest rates or shrinking balance sheets directly reduce liquidity, suppress corporate and consumer spending, and pressure the stock market.

External shocks — Natural disasters, pandemics, or energy crises can trigger global market crashes. The COVID-19 pandemic in 2020 is a typical example.

Lessons from six historical bear markets

2022 Bear Market: Rate hikes + geopolitical risks + supply chain chaos

Starting in January 2022, driven by excessive post-pandemic monetary easing causing inflation, the Russia-Ukraine war pushing up commodity prices, and aggressive rate hikes and balance sheet reductions by the Federal Reserve, this bear market was characterized by a sharp decline in tech stocks and other previously hot sectors. The continuation of rate hikes to combat inflation suggests the bear market could last until at least 2023.

2020 Pandemic Shock: The shortest bear market

From the high of 29,568 on February 12 to the low of 18,213 on March 23, then rebounding to 22,552 on March 26, achieving a 20% bounce, all within just 44 days. This is the shortest bear market in history. Learning from the 2008 crisis, global central banks quickly launched QE to stabilize cash flow, resolving the crisis and ushering in two consecutive years of super bull markets.

2008 Financial Crisis: The deepest wound

From October 9, 2007, with a high of 14,164.43, to March 6, 2009, at 6,544.44, with a total decline of 53.4%. The root causes were the real estate bubble, layered subprime risks, and excessive bank leverage. It took over five years to recover to the 2007 high, until March 2013.

2000 Dot-com Bubble: The cost of speculative hype

In the 1990s, the internet boom led to many unprofitable tech companies going public with inflated valuations. The market’s rise of over 5% often triggered bear trap pitfalls, misleading investors, and culminating in a crash. This bear market also triggered an economic recession the following year, compounded by the 9/11 terrorist attacks.

1987 Black Monday: Reflection on algorithmic trading

On October 19, 1987, the Dow plunged 22.62%, setting a single-day record. Program trading triggered automatic liquidations during sharp short-term declines, worsening the sell-off. The government responded with circuit breakers, successfully shortening the recovery cycle from ten years to 1 year and 4 months, demonstrating the power of institutional innovation.

1973-1974 Oil Crisis: The shadow of stagflation

The Fourth Middle East War triggered OPEC oil embargo, causing oil prices to soar from $3 to $12 within six months. Coupled with 8% high inflation and 4.7% negative growth, the S&P 500 fell 48%, and the Dow was halved. The 21-month bear market is one of the longest and deepest systemic collapses in modern U.S. stock history.

Three defensive strategies for bear market investing

Strategy 1: Build defenses, reduce portfolio risk

Maintain sufficient cash to handle volatility, avoid excessive leverage. Significantly reduce holdings of high P/E and high PB stocks, as these are often bubble-prone; the more aggressive the bull market, the deeper the bear market decline.

Strategy 2: Select quality stocks, hunt for bargains in lows

Focus on recession-resistant sectors like healthcare and niche companies. Also observe undervalued blue-chip stocks, using historical P/E ranges to determine entry points, and build positions gradually.

The key is that these companies must have at least 3 years of competitive moat; otherwise, they may not recover in sync with the bull market. If uncertain about individual stocks, investing in broad market ETFs is a safer choice.

Strategy 3: Understand short-selling tools to find opportunities in both directions

Bear markets have higher probabilities of decline, and short-selling success rates improve accordingly. Financial derivatives like CFDs offer two-way trading mechanisms, allowing investors to establish positions during downturns. Many trading platforms provide demo accounts for familiarization.

Bear market traps: the easiest rebounds to fall for

What is a bear market trap?

A bear market trap, also called “bear market rebound,” refers to short-term rallies lasting from a few days to several weeks within a general downtrend. A rise of over 5% is typically considered a rebound. This phenomenon can easily mislead investors into believing a bull market has started, but it is often a false signal before further declines.

How to distinguish a bear market trap from a genuine bull market start?

Observe these three indicators:

1. Over 90% of stocks trading above their 10-day moving average — reflects overall upward momentum
2. More than 50% of stocks rising — indicates a broad rally rather than isolated cases
3. Over 55% of stocks hitting new highs within 20 days — suggests a new upward cycle is forming

Only when these conditions are met simultaneously, and the rally exceeds 20% (exceeding the bear market definition), can a true bull market be confirmed. Otherwise, even if the rally lasts for weeks, it is only a bear market trap.

Final advice for investors

A bear market is not the end but a test of patience and wisdom.

Accurately identifying the start of a bear market, recognizing bear market traps, and employing appropriate tools are the three essentials for self-protection and seizing opportunities during a downturn. For conservative investors, sufficient patience and strict stop-loss and take-profit discipline are key — this is not about fleeing the market but protecting capital while waiting for the next upward cycle.

Remember: both bulls and bears can profit; the key lies in understanding the market’s pulse.