Bear Market Survival and Asset Allocation

Bear markets are inevitable, but permanent loss is not. The mix between stocks and bonds in your portfolio largely determines how far you fall during a downturn and how long it may take to recover. Historically, deeper drawdowns require higher subsequent returns and more time to get back to even, while more balanced portfolios experience smaller losses and often faster round‑trips to prior peaks (Morningstar, 2025).¹

What really happens in a bear market

A bear market is commonly defined as a stock market decline of 20% or more from a recent high. Recessionary bears have tended to be deeper and longer—think drawdowns of around 35% over roughly 18 months—while non‑recessionary bears are often shallower and shorter.² For investors, the key question is not just "How far can it fall?" but "How long until my portfolio recovers?" and that is driven heavily by asset allocation and behavior (staying invested and rebalancing rather than panicking).

The core building blocks

You can build a robust, low‑cost portfolio for any market environment using just four broad index "building blocks":

• Total U.S. stock market index
• Total international stock market index
• Total bond market index (investment‑grade, intermediate‑term)
• Cash (money market funds, savings accounts, or short-term CDs)

Total U.S. and total international stock funds provide diversified exposure to global equities and drive long‑term growth. Total bond funds diversify across government and investment‑grade corporate bonds, providing income and ballast when stocks fall. Cash adds stability and "dry powder" that tends to hold up relatively well in rising‑rate shocks and sharp equity sell‑offs.

How drawdowns translate into recovery time

The math of recovery is unforgiving. A 20% loss requires a 25% gain to get back to even, a 30% loss requires about 43%, and a 40% loss needs roughly 67% to break even. The bigger the hole, the harder and longer the climb typically becomes. Historical data shows:

• Stock‑heavy portfolios (like 80/20) can experience drawdowns well north of 30% in major bears, which often pushes recovery into the multi‑year range.
• Balanced portfolios (like 60/40) typically see smaller drawdowns and fewer double‑digit declines, which means less ground to make up and often shorter time to break even, even if raw return potential is lower (CFA Institute Research, 2023).³

At the same time, adding bonds does not eliminate bear markets; it reshapes them—trading some upside for reduced downside and, in many cases, smoother recoveries.

Sample portfolios using generic index funds

Below are illustrative portfolios using the four building blocks: total U.S., total international, total bond, and cash. These are not recommendations, but examples of how allocation influences risk and recovery.

1. Aggressive growth: 80/20 stocks/bonds

• 60% Total U.S. stock index
• 20% Total international stock index
• 15% Total bond market index
• 5% Cash

Typical bear‑market behavior (historical tendencies, not guarantees):

• Drawdowns: In a 30–40% stock bear, an 80/20 portfolio might fall around 25–30%, depending on how bonds behave.
• Recovery time: After severe global downturns, all‑equity and 80/20 portfolios have often taken around 3–6 years to fully recover from major bear markets, though fast V‑shaped rebounds can be much quicker.⁹

Who it fits: Long‑horizon investors who prioritize growth and can tolerate large swings and multi‑year recovery periods.

2. Growth with ballast: 70/30 stocks/bonds

• 50% Total U.S. stock index
• 20% Total international stock index
• 20% Total bond market index
• 10% Cash

Typical bear‑market behavior:

• Drawdowns: A 30–40% drop in stocks might translate into roughly a 20–25% portfolio decline.
• Recovery time: Historically, balanced portfolios with roughly 70% stocks have often recovered in about 2–4 years from typical bear markets, assuming no withdrawals and disciplined rebalancing, though severe recessionary bears can extend this timeframe.⁹

Who it fits: Investors who still want strong growth but would like more manageable drawdowns and a reasonable chance at recovery in a few years rather than many.

3. Classic balanced: 60/40 stocks/bonds

• 40% Total U.S. stock index
• 20% Total international stock index
• 25% Total bond market index
• 15% Cash

Typical bear‑market behavior:

• Drawdowns: Historical analysis shows 60/40 portfolios experience substantially fewer and shallower double‑digit drawdowns than all‑stock portfolios; losses in many bear markets have tended to land in the mid‑teens to low‑20% range instead of 30%+ (Morningstar, 2025).¹
• Recovery time: Long‑term stress tests across many regimes suggest that 60/40 portfolios frequently recover in about 2–3 years in ordinary recessions and around 3–5+ years after the nastier, multi‑year bears.⁴

Who it fits: Investors seeking a middle ground between growth and stability—willing to accept some volatility in exchange for historically smoother rides and often quicker recovery than equity‑heavy portfolios.

4. Defensive balanced: 40/60 stocks/bonds

• 25% Total U.S. stock index
• 15% Total international stock index
• 35% Total bond market index
• 25% Cash

Typical bear‑market behavior:

• Drawdowns: With the majority in bonds and cash, many stock bear markets show up as low‑teens or single‑digit portfolio losses when bonds hold their traditional role.
• Recovery time: Because the "hole" is shallower, many downturns historically see 40/60‑type portfolios recover in roughly 1–3 years, although prolonged low‑return environments can still stretch that out.

Who it fits: Retirees or near‑retirees who prioritize capital preservation and are willing to trade long‑term return for more predictable behavior in downturns.

Why cash matters

Adding a cash component can improve bear‑market resilience in several ways:

• No interest‑rate sensitivity: Cash doesn't lose value when rates rise.
• Crisis stability: Cash holdings provide immediate liquidity and stability during market stress.
• Rebalancing ammo: Because cash is completely stable, it is well‑suited to be deployed to buy stocks after large declines, allowing you to systematically "buy low."

The trade‑off is a lower long‑run expected return than bonds or stocks, but for bear‑market management, the extra stability and optionality can be valuable.

Cash Reserves: Your Bear Market Lifeline

One of the most critical aspects of bear market preparation is ensuring you have adequate cash reserves to meet your spending needs without being forced to sell depreciated stocks. This strategy becomes especially vital for retirees and those approaching retirement, but it applies to anyone who might need portfolio withdrawals during market downturns.

The Problem with Selling in a Bear Market

When stocks are down 20%, 30%, or even 40%, selling them to meet cash flow needs locks in those losses and eliminates any chance of participating in the eventual recovery. Worse, it creates a mathematical headwind: you're selling more shares at depressed prices to generate the same dollar amount you need. This is the essence of sequence‑of‑returns risk—the timing of when you need to make withdrawals relative to market performance can dramatically impact your portfolio's longevity (Schwab Center for Financial Research, 2024).⁵

How Much Cash is Enough?

A common rule of thumb for retirees is to maintain 1-3 years of living expenses in cash and short‑term, stable investments. This provides a buffer during typical bear markets, which historically have lasted anywhere from 6 months to 2+ years. For working‑age investors, an emergency fund of 3-6 months of expenses serves a similar protective function, preventing the need to raid investment accounts during both market downturns and personal financial emergencies.

While sequence-of-returns risk can be devastating when it occurs, research suggests it affects a relatively small percentage of retirement scenarios—studies show withdrawal strategies fail only about 4-5% of the time historically (Estrada, 2020).⁸ However, the consequences can be severe enough that prudent planning warrants protection.

The Peace of Mind Factor

Beyond the mathematical advantages, adequate cash reserves provide invaluable psychological benefits during market stress. Knowing you can meet your obligations without selling at the worst possible time allows you to maintain a long‑term perspective and avoid panic‑driven decisions. This emotional stability often translates into better investment outcomes, as it keeps you from abandoning your strategy exactly when discipline matters most.

Building Your Cash Reserve Strategy

Consider these approaches for building bear‑market cash reserves:

• Laddered CDs or Treasury Bills: Provide guaranteed returns while maintaining liquidity as they mature
• High‑yield savings accounts: Offer flexibility and competitive rates in rising rate environments
• Money market funds: Provide institutional‑quality cash management with daily liquidity
• Bond ladder strategy: Hold individual bonds to maturity, providing predictable cash flows

The key is to view this cash not as "dead money" earning low returns, but as portfolio insurance that preserves your long‑term wealth by preventing forced sales during the worst possible moments.

Behavior: the hidden driver of recovery

Asset allocation sets the boundaries of what can happen in a bear market, but investor behavior determines where you land within those boundaries. Research and practitioner experience consistently highlight three practices that improve outcomes:

• Staying invested: Panic selling locks in losses and often delays recovery because investors re‑enter after much of the rebound has already occurred.
• Rebalancing: Systematically buying what has fallen (often with bond or cash proceeds) helps you accumulate more shares at lower prices and can speed your personal recovery relative to the index (Financial Planning Association, 2020).⁶
• Managing withdrawals: For retirees and anyone needing portfolio income, having adequate cash reserves becomes critical during equity bear markets. Drawing from cash and bonds rather than selling stocks that haven't recovered can significantly reduce sequence‑of‑returns risk and extend portfolio longevity (MIT Sloan, 2024).⁷ This is why maintaining 1-3 years of expenses in cash and stable investments is often more valuable than chasing the last bit of return in a fully invested portfolio.

Putting it together

Choosing between 80/20, 70/30, 60/40, or 40/60 is ultimately about aligning:

• Maximum drawdown you can live with.
• Recovery time you can accept.
• Growth you need to reach your goals.

Broad total‑market stock and bond index funds, paired with a cash component, provide a simple, low‑cost way to express that decision across market cycles. Bear markets will come and go; a disciplined, well‑chosen asset allocation is what turns them from permanent threats into temporary setbacks on the path to your long‑term goals. Reach out to me on the contact page below to learn more about how asset allocation fits into your financial plan.

References

1. Morningstar. (2025). "150 Years of Stock and Bond Market Crashes: How the 60/40 Portfolio Held Up." Morningstar Economy.
2. Charles Schwab. (2024). "Bear Market: Now What?" Schwab Center for Financial Research.
3. CFA Institute Research. (2023). "The Performance of the 60/40 Portfolio: A Historical Perspective." Research Foundation Literature Review.
4. Wealth of Common Sense. (2025). "60/40 Portfolio Corrections, Bear Markets and Recoveries." Investment Research.
5. Schwab Center for Financial Research. (2024). "Timing Matters: Understanding Sequence-of-Returns Risk." Retirement Planning Research.
6. Financial Planning Association. (2020). "How Much Did Rebalancing Help in 2020?" Journal of Financial Planning.
7. MIT Sloan. (2024). "Mitigating Sequence of Returns Risk (SORR)." Action Learning Research.
8. Estrada, J. (2020). "Is Sequence Risk Really a Big Deal for Retirees?" MarketWatch/IESE Business School Research.
9. American Association of Individual Investors. (2024). "Rebalancing to Navigate Bear Markets and Sequence Risk." AAII Research.

Disclaimer

This content is for educational purposes only and is not personalized financial advice. Past performance does not guarantee future results. The portfolio examples are illustrative and not recommendations. Consult with a qualified financial advisor before making investment decisions