Every investor who stays in the market long enough will live through a bear market. The question is not whether one arrives, but how much of a decline your portfolio, and your nerves, can absorb before you make a decision you later regret.

No tool removes risk. Each one trades something, usually upside, liquidity or cost, for a smaller or smoother drawdown. Below we walk through the main options we evaluate in our investment management process, with how each works, what it costs, and when it may disappoint.

What a bear market is, and why protection matters

A bear market is generally defined as a fall of 20% or more in a broad index such as the S&P 500 from its most recent high. Many go further than that, and some last well over a year.

Drawdowns matter because of simple math: a 30% loss needs roughly a 43% gain just to get back to even. For someone close to or in retirement, a deep loss can also force selling at low prices. That is why limiting the depth of a decline can matter as much as chasing returns.

1. Diversification across asset classes

How it works. Spreading money across U.S. and international stocks, bonds, cash, real assets and alternatives means not everything should fall at the same time or by the same amount.

Cost. Low. A diversified portfolio will usually trail the best-performing single asset in any given year.

When it may fail. In a sharp panic, correlations tend to rise and many assets fall together. 2022 was a clear example: stocks and bonds both posted double-digit losses, a combination that is relatively rare but very real.

2. High-quality bonds and short-term Treasuries

How it works. U.S. Treasury bills and short-term Treasury notes are backed by the federal government and fluctuate far less than stocks. Longer high-quality bonds have often risen in value when the economy weakens and interest rates fall, which can offset stock losses.

Cost. Lower expected long-term returns than stocks, and income that may not keep pace with inflation after taxes.

When it may fail. When inflation and rising rates are the cause of the sell-off, longer-term bonds can lose value alongside stocks, as in 2022. Short-term Treasuries hold up better in that case but give less offset in a classic recession-driven decline.

Every form of protection is paid for somewhere: in lower upside, less liquidity or higher cost. The goal is to know the price before you need the protection.

3. Buffered (defined-outcome) ETFs

How it works. These funds use options to absorb a set portion of an index’s losses, for example the first 10% or 15%, over a fixed outcome period, often one year. In exchange, gains are capped for that period.

Cost. Expense ratios are typically higher than plain index funds, often in the range of roughly 0.5% to 0.9%. Investors usually give up dividends, and the cap limits participation in strong rallies.

When it may fail. The stated buffer and cap apply only if you buy near the start of the outcome period and hold to the end. Buy mid-period after the market has risen and you may face losses before the buffer begins. Losses beyond the buffer are fully borne by the investor, so a 40% decline in the index could still mean a large loss.

4. Managed futures and trend-following

How it works. Managed futures funds use futures contracts across stocks, bonds, currencies and commodities and follow price trends, going long assets that are rising and short assets that are falling. Because they can profit from falling prices, they have at times helped in prolonged declines. In 2022, for instance, the SG CTA Index, a benchmark of large managed futures programs, gained about 20%. Past results do not predict future results.

Cost. Fees are generally higher than for index funds, and returns can be lumpy.

When it may fail. Trend-followers need sustained moves. A sudden crash followed by a quick rebound, or a choppy sideways market, can produce losses from false signals, sometimes for several years in a row.

5. Gold

How it works. Gold is not tied to any company’s earnings or any government’s credit and has often held value during periods of financial stress, currency weakness or high inflation.

Cost. It pays no income. Storage, fund expenses and, in many cases, higher tax rates on collectible gains reduce net returns.

When it may fail. Gold can go through long periods of flat or falling prices and does not reliably rise in every stock market decline. It is best viewed as a modest diversifier, not a hedge you can count on.

6. Rules-based risk management

How it works. Instead of predicting the market, a rules-based approach sets the decision in advance. A common example is a trend signal: when an index trades below a long-term moving average, part of the stock allocation shifts to short-term Treasuries or cash, and moves back when the trend recovers. Rebalancing bands and pre-set allocation ranges are other examples.

Cost. Trading costs, possible taxable gains in non-retirement accounts, and the risk of being partly out of the market during a rebound.

When it may fail. Signals lag. Fast V-shaped recoveries can leave a portfolio sold low and bought back higher. The value lies in discipline, not precision.

7. Options-based hedges

How it works. Buying put options on an index can set a floor on losses for a period of time. A “collar” pairs a purchased put with a sold call, so the income from the call helps pay for the put in exchange for capping upside.

Cost. Puts behave like insurance premiums. Bought continuously, they can be a meaningful drag on returns, and they are often most expensive exactly when fear is highest.

When it may fail. Hedges expire. If the decline comes after the option ends, or is smaller than the strike distance, the premium is simply lost. Options also require expertise and are not suitable for every investor.

8. Fixed indexed annuities

How it works. A fixed indexed annuity (FIA) is an insurance contract that credits interest based partly on an index such as the S&P 500. In a year when the index falls, the credited amount is typically zero rather than negative, so the contract value is designed not to decline from market losses.

Cost. Upside is limited by caps, participation rates or spreads. For example, with a 7% cap, a 12% index gain would credit only 7%. Insurers can often change these terms over time. Optional riders add fees, and dividends are not included in the index credit.

When it may fail. Liquidity is the main limit. Surrender periods commonly run six to ten years, and early withdrawals beyond any free-withdrawal allowance may trigger surrender charges, and possibly a 10% IRS penalty before age 59½. All guarantees depend on the claims-paying ability of the issuing insurer. Our insurance planning team reviews contract terms and insurer strength before any FIA is considered.

Comparing the tools at a glance

How we put the pieces together

In our process, protection starts with the plan, not the product. We first estimate how much cash the household will need over the next few years and how large a decline it can tolerate without changing its goals. Only then do we choose tools. Most portfolios rely mainly on diversification and high-quality bonds, with smaller allocations to alternatives or rules-based overlays where they fit.

Combining tools matters, because each one fails in different conditions. Bonds may help in a recession, trend-following in a long grind lower, and buffers in a moderate decline. For readers focused on drawing income during a downturn, our retirement planning work covers withdrawal sequencing and cash reserves in more detail.

Frequently asked questions

Can any strategy fully protect a portfolio in a bear market?

No. Every approach reduces some risks while adding others, such as lower returns, higher costs or reduced liquidity. The aim is to limit drawdowns to a level you can live with.

Should I move everything to cash when the market falls?

Selling after a large drop locks in losses and creates the hard problem of deciding when to get back in. A pre-set plan is usually more reliable than a reaction in the moment.

Are buffered ETFs the same as fixed indexed annuities?

No. Buffered ETFs are investment funds that can still lose money beyond their buffer and trade daily. FIAs are insurance contracts designed not to lose value from index declines, but they have surrender charges and depend on the insurer’s claims-paying ability.

How often should protection strategies be reviewed?

At least annually, and whenever your goals, income needs or time horizon change.