Key Points

  • There have been about 10 bear markets since 1966.

  • Warning signs are flashing that the next bear market is coming.

  • Here are some ways to prepare your portfolio.

  • These 10 stocks could mint the next wave of millionaires ›

There have been roughly 27 bear markets since the stock market crash of 1929, but most of them occurred before 1970. Since 1970, there have been 10.

So, in the past 60 years, there has been a bear market, on average, every six years. Our last bear market, defined as the market dropping at least 20% from its recent high, was in 2022, when the market fell about 25% from January 2022 through mid-October.

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If you simply play the averages, it would suggest that we are due for another bear market in the next two years. Of course, the market doesn't work that way. We went 13 years without a bear market from 1987 until 2000, and 11 years without one from 2009 until 2020.

Then again, we had four bear markets in the 2000s alone, two of which were among the worst on record. The 2000 bear market ran for about 540 days, and the market dropped 37%. The 2002 bear market lasted more than 275 days and saw the market fall 33%, and the 2007/2008 bear market spanned more than 400 days and resulted in a 51% market drop, according to an analysis by The Hartford Funds.

While we won't know if the next bear market will start tomorrow, by the end of 2026, two years from now, or 10 years from now, there are warning signs that investors should heed.

Warning signs are flashing

We've been enjoying a nearly four-year bull market since the last bite of the bear in 2022. Just recently, on Aug. 7, the S&P 500 hit another all-time high, closing at 7,757. It's been hovering around that number since.

What's also hovering near an all-time high is the Shiller price-to-earnings (P/E) ratio, also known as the cyclically adjusted P/E, or CAPE, ratio. This gauge looks at market valuations over a 10-year period, adjusted for inflation, so it provides a broader look than the standard P/E ratio, which goes back 12 months.

The Shiller P/E ratio is currently at 42. To put that in perspective, the only time it was ever higher was in November 1999, when it peaked at 44. What followed a few months later was a bear market that lasted some 546 days.

No two markets are the same, and this market is certainly different than the one that led to the 2000 bear market, but even so, these are caution flags that should remind investors to be prepared. Here are a few things you can do to prepare.

Bear-proofing your portfolio

One of the first things to do to prepare for a bear market or correction is to identify stocks in your portfolio that have abnormally high P/E ratios. For some growth stocks, a normal P/E might be 30, but an abnormal or above-average P/E might be 50 or 60. It all depends on the specific stock.

Those well-overpriced stocks are probably going to be the hardest hit when the bear attacks, so you may want to think about paring some of those positions back.

Next, make sure your portfolio is diversified, and not top-heavy in too many growth stocks or large-caps. These are the stocks that have been leading the bull market, so they may have gained greater weight in your portfolio over the years.

Diversify the stock portion of your portfolio with holdings that tend to do well coming out of bull markets, like value stocks, international stocks, small-caps, and high-yield dividend stocks. Make sure the stocks are reasonably valued and have strong, consistent earnings to support their price. Speculative stocks, or those that are overhyped without real positive earnings, could be more susceptible to a steeper drop if there is a market downturn.

For what it's worth, Vanguard's current model portfolio recommends 36% U.S. stocks and 24% international stocks. It also calls for 40% in bonds, with 28% in U.S. bonds and 12% in international bonds.

Exchange-traded funds (ETFs) are a good option in a bear market too, as they come already diversified. You may want to lean toward actively managed ETFs, as a portfolio manager can make changes to the portfolio as needed to navigate the ups and downs.

Finally, look for bargains. Bear markets are the best times to find bargains on great stocks after their prices and valuations plummet to more sustainable levels.

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