Investment Strategy

Invest like a Millionaire in the Current Bear Market

We have staggered into the domain of an official bear market, with the S&P 500 closing more than 20% down from recent highs. One thing we’ve learned from history is that the markets will not unofficially bottom until the last retail investor has capitulated and sold into the fear.

We are not there yet.

It appears to be counterintuitive to continue to invest in a market that is in free fall. However, this is exactly what the likes of Warren Buffett and other millionaire/billionaire investors do, with one caveat. They are in the markets for the very long term.

Buffett’s investment vehicle, Berkshire Hathaway, has compounded capital at more than 20% for the last 50 years. Raise your hands if you would sign up for that return today. Like the previous bull market, we have been in for over a decade, bear markets come and go as well. Knowing that such downturns will be a part of the investment landscape now and in the future, one should have a plan for what to do during such tumultuous times.

The following chart depicts a timeline of bear markets dating back to the Great Depression. 

Investor sentiment is one component of the genesis of a bear market. Bear markets are characterized by investors’ pessimism and low confidence. During a bear market, investors often seem to ignore any good news and continue selling quickly, pushing prices even lower, until ultimately all our capitulation unfolds.

A bear market often occurs just before or after the economy moves into a recession, but not always. Investors carefully watch key economic signals like hiring, wage growth, inflation, and interest rates, to judge when the economy is slowing. Of the bear markets that have occurred since 1928, fourteen (56%) have also seen recessions while eleven have not (44%). To date, the deepest and most prolonged bear market was the 1929-1932 slump that was accompanied by the Great Depression. 

Let’s first take a look at some of the common mistakes investors make when a bear market arrives. Fear-induced panic selling is popularized during these times. Investor sentiment of fear takes hold and emotion forces them to liquidate long-standing positions. According to Katie Nixon, chief investment officer at Northern Trust Wealth Management, “Individual investors tend to sell after an economic downturn is already priced into equity markets.”

This is the polar opposite of dollar-cost averaging when a market is on the way down. If you are invested for the long haul, buying the market during periods of recession has worked in every bear market in history. In addition to selling stock during bear markets, investors need to look at savings and carefully determine if and when to pay down debt. Yes, it is advised to pay down higher interest rate debt when rates are rising if you have the cash flow to support it.

According to Thomas Blower, a financial planner in Grand Rapids, Michigan, “Paying off credit card debt is among the best things you can do when interest rates are rising and uncertain market conditions are ahead, but some people take paying down debt too far.” Lastly, modify your spending in uncertain times, and don’t continue on the same expense path as you would in times of rising GDP. Don’t add new fixed expenses, such as another car loan, if you can avoid them.

The idea is to keep your regular expenses as trim as possible. 

Contrary to investor sentiment, you can make money in a bear market. You can make money when markets fall by taking short positions. This can be done by selling short stocks or ETFs, buying inverse ETFs, buying put options, or selling futures.

If you’ve been following recent market action, you’ll notice that markets tend to move downward at an exponential clip compared to their upward move in a bull market.


Similar in vein to a dollar-cost averaging approach, professional investors will typically be focused on a longer-term investment horizon of perhaps five to ten years, and instead of making one or two large bets on the markets, as a hedge fund might do, they are focused on a series of well thought out smaller investments.

If one or two don’t pan out, it shouldn’t have a significant effect on the overall portfolio. According to Clark Kendall, CEO of Kendall Capital in Rockville, Maryland, “They manage risk by making a series of small decisions and know that any decision can be a wrong decision, but a series of well-thought-out small decisions will typically outperform just one make-or-break large decision.”

Bear markets tend to have a negative impact on growth and technology stocks more so than value stocks, which have a lower risk, albeit potentially lower returns. For portfolios tilted towards speculative stocks, that means some diversification into value, even if it is overdue and takes place during a bear market. It can pay dividends figuratively as well as literally long after the bear market in history.

Remember that while bear markets can trigger fear, they can also be longer-term windows of opportunity. According to Drue Kampmann, co-founder of True Financial Partners in Bettendorf, Iowa, “Millionaire investors often have the advantage of the experience on their side, allowing them to view bear markets in a different light. This leads them to see downturns as opportunities to buy assets at a discount, which can pay off later when stock prices begin to rise.” Over any given 20-year period, the market has never been down. 

This should help keep things in perspective, and for those who have time on their side, patience can be rewarded.

Investment StrategyWealth Mgmnt