A bear market 401(k) strategy typically has three parts: stay invested, keep saving, and check that your funds fit your retirement goals. All three get harder in a bear market, when stock prices fall at least 20% from recent highs. Your statement may look rough, but at least contributions have more purchasing power than in a bull market.
Key Takeaways
- A bear market is a drop of 20% or more from a recent high. There have been approximately 22 bear markets since 1929, they have lasted under a year on average, and every one has ended.
- The best bear market strategy for a 401(k) is usually the simplest one. Stay invested, keep contributing, and rebalance back to your target mix instead of moving to cash.
- Down markets are a buying opportunity for long-term investors. Your regular 401(k) contributions automatically buy more shares at lower prices through dollar cost averaging.
What is a Bear Market?
A bear market is when stock prices fall 20% or more from their most recent high and stay down for at least a 2-month period. It is different from a dip during a bad week or a bad month. A bear market is a longer slide, and it often comes with worries about the economy, like slower growth or job losses.
The 20% drop is measured from a recent high, but it’s not an official designation. However, it is a term commonly used by investors, regulators, and the financial press.
Bear markets are a normal part of investing, and they have always ended eventually. Since 1928, the average bear market has lasted less than a year, while the good stretches in-between have run much longer.
For 401(k) savers, a down market can even work in your favor, because the money you contribute each payday buys shares at lower prices. Staying invested and keeping your contributions going is usually the smarter move than trying to guess when the bottom hits.
Check out our full guide on investing when markets are down.
Bear Market vs. Bull Market: What Is the Difference?
A bull market is the opposite of a bear market. Prices climb instead of fall. History shows that over time, the good stretches have been longer and stronger than the bad ones.
| Bear Market | Bull Market | |
|---|---|---|
| What is happening | Stock prices are declining and market sentiment is pessimistic | Stock prices are rising and market sentiment is optimistic |
| Size of market movement | A broad market index falls 20% or more | A broad market index rises 20% or more |
| Minimum length | At least two months | At least two months |
How Long Do Bear Markets Last?
There is no set length for a bear market. Bear markets have varied considerably, from a few months to several years. Since 1929, the U.S. stock market has had approximately 22 bear markets. Each one has been followed by a recovery.
Here is what matters most for 401(k) investors: even though your account balance has dropped, you have not actually lost money. You only recognize a gain or a loss when you take a distribution.
The longer you stay invested, the more that history works in your favor. Crestmont Research examined every rolling 20-year period for the S&P 500 going back to 1926. Every single one — including periods that began just before the Great Depression, just before the dot-com crash, just before 2008 — delivered positive returns. While it’s not a guarantee, it’s a powerful data point about the nature of long-term investing.
What Is the Best Bear Market Strategy for a 401(k)?
The best bear market strategy for a 401(k) is typically to keep contributing, rebalance back to your target mix, and leave the rest alone. Savers who come out of downturns in the best shape are usually the ones who made the fewest moves.
Remember: a good strategy is less about reacting fast and more about checking that your existing plan still fits.
To see exactly how this plays out in dollar terms over 20 years, we walk through a detailed hypothetical in our companion piece on what to do when markets drop.
The short version: an investor who stayed the course ended up with more than double the retirement balance of one who moved in and out.
401(k) Investing During a Bear Market
Your asset allocation is how your money is split across stocks, bonds, and cash. A bear market could be a good time to evaluate your risk tolerance and the overall picture of your investments. Remember to make any adjustments based on facts and rationale rather than on an emotional reaction to the market dip.
Not everyone has the same relationship with risk, and not everyone should. Start with your timeline. If retirement is 30 years out, your investments should have time to recover. If you are five years out or already drawing income, it is fair to ask whether you are carrying more risk than you meant to.
Past results are not guarantees of future returns. However, stocks tend to deliver higher returns over time, but they are significantly more volatile. Bonds and cash are more stable but give up potential investment returns. Generally, the more you hold in stocks, the more your portfolio will swing. The more you hold in bonds and cash, the smoother the ride.
Do you know your investment style? Take our quiz to find your risk tolerance.
A bear market is a good time to think honestly about where you sit in your retirement timeline. Here are some general guidelines to consider.
| Your Time Until Retirement | General Guidelines |
|---|---|
| More than 10 years | A stock-heavy portfolio is usually appropriate. Short-term volatility matters much less when you have a long runway to recovery. |
| 5 to 10 years | A gradual shift toward more bonds and stable assets makes sense. One starting point is your age plus 10 in stocks. At 55, that is roughly 65% stocks. |
| Within 5 years | Think about building a 2-year cash buffer so a downturn does not force you to sell stocks at a low point in the market. |
| Already retired | Keep some stocks. Many people expect to live 20 to 30 years past 60, and stocks can help propel growth. |
ShareBuilder 401k does not offer tax or legal advice. Consult with your tax or legal advisor before engaging in specific strategies.
Minimize Bear Market Losses with Diversification
Diversification will not stop you from losing money in a bear market. But it can help minimize losses while you wait for the market to recover.
Types of investments do not typically change in value at the same rate at the same time. Purchasing more investment types, such as stocks and bonds, lowers your overall risk of losing money. However, keep in mind there are no guarantees of market performance.
Where people get tripped up is holding too much of one kind of asset without knowing it, or leaving money in whatever default it landed in on day one. A downturn is a good nudge to open the account and re-assess your asset allocation.
Plans built on low-cost index funds give employees a diversified start without asking them to become investment experts.
Two moves to consider:
- Rebalancing. When stocks fall, they make up a smaller slice of your account than you planned. Rebalancing brings you back to your target, which means buying a little of what dropped. It sounds backward. It is really just buying low on purpose.
- Keeping contributions steady. Every paycheck you put in during a downturn buys shares at lower prices, and those shares do the heavy lifting when the market turns.
The Positives of a Bear Market
The automatic investing nature of a 401(k) is one of its most underappreciated features — and it becomes even more powerful in a bear market. Every pay period, your contribution buys shares at whatever the current price is.
When prices are high, you buy fewer shares. When prices are low, you buy more. This is called dollar cost averaging, and it means a bear market is actually an opportunity.
Remember: bear markets are normal. There have been many since 1929, about one every three or four years, and every one of them ended. Staying strategic helps make sure that you benefit from the eventual market recovery.
How Do You Handle the Emotional Side of a Bear Market?
Most experts agree that long-term investors should wait rather than reacting immediately during a market downturn, but that’s easier said than done.
Here are some tips to keep anxiety in check and investments steady:
- Stop checking daily prices: Looking at your account every day can increase anxiety.
- Turn off notifications: Disable financial app alerts on your phone.
- Avoid panic headlines: Media outlets use fear to get attention. Take a break from financial news.
Fear is a normal response to watching your savings shrink, but cashing out of the market could lock you out of future gains.
Surviving a Bear Market
While history offers no guarantees, it offers a compelling track record. The market has recovered from every downturn on record. The investors who have come out ahead are almost always the ones who stayed invested, kept contributing, and used the difficult periods to evaluate their risk tolerance.
If you have a ShareBuilder 401k plan, log in and make sure your contributions are still active. Check your model portfolio and see if it still fits when you plan to retire. And if automatic enrollment set your savings rate for you, decide whether you want to adjust it. Your customer success manager can walk you through any of these steps.
Be well and prosper.
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FAQs
What is the difference between a market correction and a bear market?
A market correction is a decline of 10% or more from a recent high. A bear market is a decline of 20% or more, typically lasting several months to over a year. Bear markets are more psychologically demanding because the duration tests investor resolve in a way a quick correction does not. The 401(k) strategy is the same in both: stay invested and keep contributing.
How long do bear markets typically last?
Bear markets have varied considerably in length, from a few months to several years. Historically, every bear market has been followed by a recovery, and the average bull market has lasted significantly longer than the average bear. For 401(k) investors with a long time horizon, the duration matters less than the decision to stay invested through it.
Is a bear market a good time to start a 401(k) for my business?
It can be one of the better times. Every dollar your plan invests during a downturn buys shares at lower prices.
Are there tax credits to help my business start a 401(k) plan?
Employers with 50 or fewer employees may also claim a federal tax credit worth 100% of qualified startup costs. That is up to $5,000 a year for three years, plus $500 a year for adding automatic enrollment. Check the IRS’s guide for the full rules.
Should I stop contributing to my 401(k) during a bear market?
No. Stopping gives up the buying opportunity that lower prices create. When the market recovers, the shares you bought at the lows should drive the biggest gains. If money is genuinely tight, lowering your contribution beats stopping altogether.
How do I know if my 401(k) allocation is right for me?
If a prolonged downturn is genuinely disrupting your sleep or causing you to consider selling, your allocation may not match your actual risk tolerance. A risk tolerance questionnaire can help you find an allocation you can maintain through the full market cycle, not just the good parts. The right allocation is the one you’ll stick with.