The standard definition of a bear market is that one occurs when stock indices drop 20% or more from a recent high for a sustained period. Indices have avoided a bear market in 2025 so far, although they have approached the mark a few time in April so what is the best way to navigate them?
Invest in Solid Companies at Lower Prices
When the stock market is down, it offers a prime opportunity to invest in companies that might have seemed out of reach previously based on their higher prices.
Strong balance sheets sit at the top of your list when choosing a company to invest in. Look for a low debt-to-equity ratio, a strong current ratio of 1.5 or higher that shows a company can manage short-term obligations, plenty of cash reserves, and a diverse selection of quality assets.
Other metrics to examine on a balance sheet include positive working capital and a high book value of equity. If a company has equity, that usually shows that the company pays out profits to owners and shareholders.
A few stocks with strong balance sheets include Zoom (ZM) and Shopify (SHOP), two tech stocks that seem insulated from the current slide.
Does the business generate steady profits and dividends? Good earnings typically indicates it is more willing to pay dividends to shareholders. Earning dividends means you get rewarded for holding onto stock for longer periods of time rather than selling your shares.
Less volatility versus the overall volatility of the market is also important. A bear market typically means a strong dip in stock prices but you can look for stocks that haven’t dropped as much as the entire index. If indices go down 20% as a whole, seek out stocks that declined a fraction of that amount, like 10 to 12%. Lower downturns and less volatility can mean those particular stocks recover faster than ones that dropped by a larger percentage.
When employing this strategy, consider moving away from enterprises that have less-than-ideal balance sheets to ones with more solid numbers. This is one of the top ways to shift your portfolio during a bear market.
Employ Strategies That Hedge Funds Use
In general, it’s wise to stay the course with your investments to earn dividends and potentially sell your stock at a higher price than you bought it.
Dynamic risk allocation includes moving some investments to less risky propositions in shorter timeframes, such as once a week. This achieves fewer potential losses as well as higher returns. Dynamic risk allocation also requires a cautious, expert-level approach.
One way to help make your decision is to use reliable metrics, such as Financhill’s proprietary Stock Score, to help alleviate risk in a bear market.
Hedge fund managers often use algorithmic models to identify price trends. They can use these trends to determine which stocks to invest in during times of volatility, including when stocks drop.
One thing to keep in mind is that hedge funds tend to perform better in bear markets than mutual funds. Consider moving some portions of your stock portfolio in ways that hedge fund managers do when markets are volatile, such as short selling, using leverage, or derivatives to generate absolute returns.
60-40 Rule for Stocks and Bonds
The 60-40 rule for stocks and bonds can be a relevant strategy to employ during a bear market. The rule means investing 60% of your capital in stocks and 40% in bonds. If you have $1 million to invest, the 60-40 rule can return more than $80,000 a year in income for a typical use case, but individual portfolio outcomes may vary.
The traditional 60-40 rule has come under scrutiny since 2022 because humans are living longer. You may need to adjust a 60-40 strategy to maintain a certain level of income well into your 90s because healthcare expenses could be higher due to a longer lifespan.
Investors have noted that the volatility of the 60-40 plan has increased over the past three years, with the volatility coming in higher than the returns. As such, the 60-40 stock-bond split might not be tenable during stable, rising markets. But this strategy could work well when shifting your portfolio during a bear market. Make sure you re-examine and re-adjust the 60-40 matrix after the market recovers.
Cross-Asset Strategies
Diversification is always recommended when investing in stocks. This is despite Warren Buffett’s assertion that, “Wide diversification is only required when investors do not understand what they are doing.”
Knowing how to shift your portfolio in a bear market means looking at cross-asset strategies. This means balancing investments beyond stocks in securities such as commodities, currency, bonds, and gold.
You don’t necessarily have to consult a commodities broker or gold dealer to make this switch. Instead, seek asset classes that exist on stock exchanges you can purchase. For example, gold mining or gold exchange-traded funds (ETFs) allow you to invest in these types of securities.
You can also find bonds listed the same way, such as the Vanguard Total Corporate Bond ETF (VTC), although TreasuryDirect.gov allows you to easily purchase U.S. government bonds. Some international ETFs have currency as part of the investment portfolio. Commodities such as oil also have ETFs, like the GUSH ETF that tracks the S&P Oil & Gas Exploration & Production Select Industry Index (SPSIOP).
With so much trading technology available, it’s relatively easy to purchase assets other than stocks once you find a reputable marketplace. However, you can keep it simple if you prefer stocks through a tried-and-true method you already employ.
How to Shift Your Portfolio During a Bear Market for Best Results
Doing your research is the best defense against volatility when a bear market hits. No single strategy can eliminate all the risks in your investments, but employing slightly different tactics during a bear market could help you achieve better results in the short term.
Of course, you don’t have to shift your portfolio if you prefer to wait for the downward shift in stock prices to turn upward again. Your stocks may eventually generate dividends or capital gains again, as they did prior to the bear market.
The online tools you have at your disposal, plus consulting a financial advisor, make it easier to develop an investment strategy that works for your situation in any kind of market.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.