How to Prepare for Bear Markets Without Panic

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How to Prepare for Bear Markets Without Panic

Is a bear market coming? It’s a dangerous question.

It’s like fire.

It can light the way when used properly. It can burn everything to the ground if it’s not mixed with knowledge and proper planning.

I’ve seen two primary ways advisors and investors try to protect assets when markets start to feel unstable.

The first is gut instinct that is structured into a seemingly logical argument — it starts with a sense that something feels off, and then gets explained with a mix of personal views about politics, headlines, or recent market behavior.

The second is a checklist approach — dozens of indicators watched simultaneously, so complex and slow-moving that by the time they align, the damage is already done.

Neither of these outcomes is what most long-term investors actually want.

And more importantly, neither approach reliably works.

Why Market Timing Doesn’t Work (Even When You’re Right)

Here’s a hard truth that feels backward at first:

Trying to time bear markets as a long-term strategy almost always leads to lower long-term returns.

Not theoretically.
Statistically.
This is what happens according to clear, repeatable studies.

Why?

Because true bear markets — declines of 20% or more — occur far less frequently than people feel like they do.

On average:

• Bear markets occur about once every 3–5 years (in the last several decades)

• But the spacing is wildly inconsistent

  • 2020 to 2022: less than 2 years

  • 2009 to 2020: about 11 years

While we can talk about averages all day long, the truth is that markets don’t operate on calendars.

And this is where investors get trapped.

Pullbacks, Corrections, and Why Everything Feels Like a Bear Market

Bear markets feel common because smaller declines happen constantly.

• Pullbacks of 5–10% average 3–4 times per year

• Corrections of 10–20% average about every 18 months

Each one is accompanied by urgent headlines, confident forecasts, apocalyptic language, and an endless debate about whether this time is different.

When you start asking:

• “Are we heading into a bear market?”

• “Should I liquidate my portfolio?”

• “Should I go to cash in my portfolio?”

You’re not irrational.

But statistically, the odds that investors will exit during a temporary decline — rather than a true bear market — are extremely high.

And that mistake is costly.

The Real Cost of Going to Cash at the Wrong Time

Here’s a common pattern:

• Market drops 10%

• Fear spikes

• Investor goes to cash

• Market rebounds 15%

• Investor waits until things “feel normal” again

• Investor re-enters higher than where they exited

That sequence locks in losses and forfeits compounding.

Imagine this scenario starting with $100,000. You liquidate at $90,000. You buy back in once markets rebound 15%. If you’d ridden through the downside, you’d have $103,500. But you don’t, because you tried to forecast what was next, and now you’ve missed out on $13,500.

Compounded at an average 8% rate of return over 20 years, that’s nearly $63,000 in future value that you’ve paid for the reward of “feeling comfortable” in a downturn.

Maybe it was worth it. Maybe it wasn’t.

But when this happens more than once, and with bigger numbers, this really begins to be a major detractor of long-term wealth.

Studies consistently show that many of the market’s best days occur close to its worst days. Miss just a handful of those rebound days, and long-term returns often drop in half.

This is one of the clearest demonstrations of why regular market timing doesn’t work, even for intelligent, disciplined people.

But What About Real Bear Markets?

Bear markets like:

• 2000–2002 took roughly 7 years to fully recover

• 2008–2009 took about 5.5 years to hit new highs

These are not trivial events. They can alter retirement timelines and risk tolerance.

So the answer isn’t “ignore risk.”

The answer is investment risk management, not emotional reaction.

Asset Allocation vs. Market Timing

Here’s the secret most investors never fully internalize:

If your portfolio is structured properly from the beginning, you can often reach your long-term goals without avoiding bear markets at all.

And they often achieve higher long-term average rates of return than those who time the markets.

Proper asset allocation — aligned with time horizon, cash needs, and psychological tolerance — historically produces better outcomes than attempting to jump in and out.

This is the core distinction between asset allocation and market timing:

• Market timing tries to get-rich-quick or avoid short-term discomfort

• Asset allocation accepts volatility but controls damage

And controlling damage matters more than predicting headlines.

So…Is a Bear Market Coming?

This is where people want certainty.
And certainty in markets doesn’t exist.

I’ve studied bear markets for years — through formal education with the CFA Institute and through hands-on experience alongside a long-term, market-beating fund manager.

Out of that experience, I track my own rules-based set of fundamental and technical bear market indicators — not gut feelings, not political narratives, and not social media consensus.

The thresholds are intentionally designed to avoid constant noise, while still being sensitive enough to identify elevated risk early in many bear market cycles.

Whether through my own research or through a disciplined framework you trust, the principle is the same: decisions should come from rules, not reactions.

For members of The Citadel, I maintain this bear market watch on the dashboard. I explain many of the underlying signals as part of The Quest in Investing Islands, adjusting their relative weights over time as research evolves and new evidence emerges.

Will these indicators catch a bear market before it even begins?
No.

Will they produce false or uncertain signals from time to time?
Yes.

But the goal is not perfection.

The goal is probability — recognizing when risk is rising enough that adjustments may be warranted before the worst damage occurs, not after.

What to Do Before a Bear Market (Without Guessing)

Before anything happens, the primary driver of long-term returns is asset allocation.

That is, how much you allocate toward stocks, bonds, alternatives and cash.

With just a properly designed portfolio from the beginning, without changing it dramatically due to market forecasts, you’re far more likely to experience a higher average annual return than even a professional who is attempting to forecast the market’s next move.

When risk rises, the question is not:

• “Do I sell everything?”

Better questions are:

• How exposed am I to downside?

• What risks am I being compensated for?

• What types of risk am I taking? Are they balanced properly?

• What am I trying to protect — income, principal, time horizon?

This is where thoughtful investment risk management comes in:

• Adjusting allocations

• Increasing diversification

• Reducing concentrated risks

• Preparing psychologically for volatility

None of this requires perfect forecasting.
It requires planning.

How Do You Know When a Bear Market Is Over?

This is the most overlooked — and arguably most important — part of the entire discussion.

Missing the downside does not help you if you miss the recovery.

Markets do not feel “safe” at the bottom. They feel broken. It’s usually a dark time with ultra-high pessimism.

Suspicion lingers and recency bias dominates.

By the time everything feels normal again, a large portion of the early bull market gains are already gone — and those early gains are often some of the strongest of the entire cycle.

When someone asks, “Is a Bear Market Coming?” they also need to ask, “How do you know when a bear market is over?” This matters just as much as recognizing the risk going in.

Without a rules-based framework:

• Fear and uncertainty keeps you out too long

• Caution turns into opportunity cost

• “Being careful” quietly becomes expensive

A disciplined system helps answer:

• How to know if the market is bullish or bearish

• When risk has meaningfully shifted

• When staying out creates more risk than staying in

Planning Beats Prediction

At the end of the day, this isn’t about forecasts.
It’s not about calling tops or bottoms.
And it’s certainly not about reacting to headlines.

It’s about knowing:

• What you’re risking by being invested

• What you’re risking by stepping aside

• Why you’re making any change at all

And being at peace with the outcome, because you planned ahead.

Markets will always test patience.
But history consistently rewards those who prepare more than those who try to profit from constant predicting.

Preparation looks different for everyone, but it always starts with a system.

Whether that means committing fully to a long-term asset allocation, or using modest, rules-based risk management to reduce bear market exposure, strategic investing begins with structure.

Consistency matters more than activity.
And having a system matters more than getting every call “right.”

Daniel Lancaster, CFA

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