Why Bear Markets Are Actually Good for Investors

Remember the last time the market tanked and your portfolio looked like it had been run over by a truck?

I do. I was staring at my screen, coffee going cold, wondering if I should just sell everything and hide under the bed. Then something strange happened – six months later those same “destroyed” positions were some of my best performers ever. That experience taught me something counterintuitive: sometimes the scariest moments in investing are actually doing us a favor.

Today I want to make a case that might sound crazy at first: bear markets aren’t just inevitable – they’re necessary and, dare I say it, good.

The Hidden Benefit Nobody Wants to Talk About

We’ve been conditioned to see falling prices as pure evil. The media screams “blood in the streets,” politicians rush to “do something,” and central banks flood the system with money the moment the S&P drops 10%. But what if all that panic is missing the point?

Think about nature for a second. Forest fires look apocalyptic while they’re happening. Animals flee, trees burn, smoke blocks the sun. Yet ecologists will tell you that many forests literally need periodic fires. The flames clear out dead wood, return nutrients to the soil, and let sunlight reach new seedlings that have been waiting years for their chance.

Markets work the same way. When everything goes up forever, junk piles up. Weak companies that should have died years ago keep limping along on cheap debt. Investors get sloppy. Valuations detach from reality. Everyone starts believing “this time is different.”

Then the bear comes along and burns it all down. And just like after a forest fire, what grows back is usually stronger and healthier.

The Three Types of Bear Markets (And Why Each Serves a Purpose)

Not all bears are created equal. Investment researchers generally break them into three flavors:

• Event-driven – Think 1987 Black Monday or the 2020 COVID crash. Sharp, scary, but usually short.
• Cyclical – Normal end-of-expansion corrections that clean out moderate excesses.
• Structural – The big ugly ones (2000-2002, 2007-2009) that follow massive bubbles and too much leverage.

Here’s the kicker: the really dangerous crises almost always follow periods where we didn’t have enough normal bear markets. When corrections get suppressed for years, the eventual reckoning becomes way worse.

“The stock market is a device for transferring money from the impatient to the patient.”

Warren Buffett

What Actually Gets “Cleaned” During a Bear

Let’s get specific. When stocks drop 20-30%, magic starts happening behind the scenes:

• Overleveraged companies finally face reality and restructure (or disappear)
• Management teams that were coasting suddenly care about profits again
• Investors stop paying 100x sales for companies that barely make money
• Capital gets re-allocated from weak hands to strong hands
• Risk premiums return to normal (making future returns higher)
• Speculative garbage gets exposed and destroyed

I’ve lived through enough cycles to notice something funny: the companies that survive real bear markets tend to absolutely dominate the next bull. They’ve already been stress-tested. Their balance sheets are clean. Their managements are battle-hardened. Buying them at depressed prices is like picking up future compounders at a fire sale.

The Central Bank Problem Nobody Wants to Admit

Here’s where things get controversial.

Every time the market tries to have a normal healthy correction, someone in a position of power panics and “saves” us. Zero interest rates. QE. Direct stock purchases (looking at you, Bank of Japan and SNB). The message is clear: falling prices will not be tolerated.

But preventing forest fires doesn’t make forests safer – it makes the eventual fire catastrophic. Same with markets. When we short-circuit every correction, we’re just loading the system with more dead wood for the next blaze.

In my opinion, we’d be much better off with a painful 20-25% correction every five years than one 50% crash every twenty. The math works out better for long-term wealth creation, even if the ride is bumpier.

Why Smart Money Loves Bear Markets

While everyone else is losing their minds, professional investors with dry powder are quietly celebrating.

Why? Because bear markets create the best buying opportunities we’ll see in a decade. The kind of prices that let you build generational wealth if you have the stomach to act.

Some real numbers to chew on:

• The average bear market lasts about 14 months and drops roughly 33%
• The average bull market that follows lasts 5+ years and returns over 160%
• Investors who bought at bear market lows have historically earned 15-20% annualized returns over the next decade
• Missing just the best 10 days in the market over 30 years cuts your returns by more than half

Translation: the worse the bear, the better the setup for the next leg up.

How to Prepare Right Now (While Everyone Else Panics Later)

If you buy the argument that bear markets are healthy, the logical question is: what should you be doing today?

Here’s my personal checklist that I review every quarter:

1. Stress-test your portfolio – Could your holdings survive a 50% market drop? Be honest.
2. Build cash reserves – I try to keep 10-20% in cash or short-term bonds during late-stage bull markets.
3. Create a watch list – Great companies you’d love to own at 30-50% lower prices. Have it ready.
4. Know your prices – Write down exactly what you’d pay for each name on that list.
5. Practice your process – Re-read your investment journal from the last correction. What would you do differently?
6. Strengthen income streams – Bear markets hurt less when you have dividends or other cash flow coming in.

The investors who get wrecked in bear markets aren’t usually the ones with bad stocks – they’re the ones who never prepared emotionally or financially for the inevitable.

The Psychological Gift of Bear Markets

Perhaps the most underrated benefit is what bear markets do to our brains.

Bull markets make us stupid. We start believing we’re geniuses. Risk feels free. Everyone has a “system” that can’t lose.

Then the bear shows up and reminds us that investing is hard. That markets can stay overvalued longer than we can stay solvent (thanks Keynes). That sometimes the best trade is the one you don’t make.

These lessons are painful but priceless. Investors who’ve lived through real bear markets tend to make better decisions for the rest of their lives.

Final Thoughts: Embrace the Bear

Look, nobody enjoys watching their net worth drop 30%. I get it. But pretending bear markets are optional or purely destructive is like pretending winter shouldn’t exist.

The market isn’t your enemy during a correction – it’s performing necessary surgery. Removing the cancer of excess so the body can grow stronger.

The investors who understand this don’t just survive bear markets.

They use them.

And when the next bull market begins – as it always does – they’re the ones positioned to compound wealth at rates that make the pain feel like a distant memory.

So next time the headlines scream about crashing markets, try to remember: this too is part of the process. The forest needs fire. The market needs bears.

And the patient investor who understands this simple truth usually ends up with most of the acorns.