Question: I am very worried that the AI bubble is going to crash soon. What should I do?
A bear market in stocks is generally defined as a 20 percent drop in value from the peak. On average, bear markets occur about every three years, last for 10 months, and require two and a half years to recover. As I write this in November 2025, our last bear markets were January to October 2022 (a 27 percent drop in U.S. stock prices) and February to March 2020 (a 34 percent drop in U.S. stock prices). A knowledge of financial history arms an investor with the means to control the most important factor in their investment returns and financial security: their own behavior.
After exceptional returns, particularly among U.S. large-growth tech companies, (aka artificial intelligence (AI) stocks), for the last three years, many investors are worried about a bubble. While bubbles, and particularly the date they’ll burst, are challenging to identify in advance, we are sure to have another bear market at some point in the future. A wise investor prepares in advance for bear markets and controls their own behavior throughout the bear market to avoid serious financial setbacks.
Preparing for a bear market is critical. Perhaps the most important thing is to educate yourself about stock market history in advance, then incorporate that knowledge into a written investment plan that you can follow in the throes of a bear market. A solid written plan will dictate what you invest in and how you behave during a bear market. Then all you have to do when the bear market actually occurs is keep your commitment to yourself by following the plan.
A solid investing plan is diversified, both between and within asset classes (or types of investments). For example, my personal long-term asset allocation (mix of investments) dictates that I will have 40 percent of my money invested in U.S. stocks, 20 percent in international stocks, 20 percent in bonds, and 20 percent in real estate. If U.S. stocks have a bad year, my new investment money will go toward those stocks to bring the portfolio back into balance. If things get really bad, I might even have to sell some of those other assets to buy more U.S. stocks. Although it doesn’t feel very good to buy something that has recently gone down in price, history informs us that these purchases usually have the best long-term returns. Using broadly diversified investments such as index funds, rather than a few individual stocks, also allows us to have confidence in the eventual recovery of money lost in a bear market.
Additional preparation includes keeping a reasonable amount of money in cash, or at least, very safe investments. Money you expect to spend in the next few years doesn’t belong in the stock market, much less next quarter’s estimated tax payment or a down payment for an upcoming home purchase.
A good plan not only tells you what to do in a bear market (stay the course, rebalance, continue to invest), it tells you what not to do. It will tell you to avoid changing your asset allocation, panic selling, market timing, stock picking, using actively managed mutual funds, and other activities that have been shown to decrease long-term returns.
Once you are in a bear market, all you have to do is follow your previously written plan. Lots of investors don’t realize they need a written plan, so a bear market often provides the impetus to do some real financial planning. Here are some other useful things you can do in a bear market.
The most important consideration, assuming you have a reasonable mix of diversified investments like index funds, is to make no major changes. “Stay the course!” Jack Bogle, founder of The Vanguard Group Inc., famously said. Some people find it easier to stay the course if they are not frequently reminded about poor performance. They avoid financial news like the plague, turning off CNBC and avoiding investment magazines. While no long-term investor needs to check their investments every day or even every month, if you know your plan is reasonable and your portfolio is diversified, you may find it better not to look at investment statements until the bear market is over in a few months, or even a couple of years.
While it’s no fun to lose money, at least in a taxable account Uncle Sam will share your pain. When recently purchased shares of an index fund go down in value during a bear market, you can swap them for shares of a similar, but not “substantially identical” (in the words of the IRS), index fund. Without significantly changing your asset allocation, you have booked a capital loss that you can use against future capital gains and even $3,000 worth of ordinary income each year.
When you set up your portfolio, you choose to take on a reasonable amount of risk, often defined by a ratio of stocks to bonds or other safe investments. In a bear market, that ratio is likely significantly changed. It’s time to rebalance the portfolio back to the original ratio, essentially forcing yourself to sell high and buy low.
Your first bear market or two is a great time to get to know yourself as an investor. Are you lying awake at night worrying about your money? Or are you wishing you could pile even more money into the market and buy shares “on sale?” If the former, you might want to decrease your long-term stock to bond ratio (after the market recovery, of course). If the latter, you might want to increase that ratio — again after you’ve seen the bear market through.
Bear markets are a great time to invest more money, since you can purchase more shares with any given amount of money due to the lower prices. Conversely, bear markets are a rough time to sell shares in order to get more money to spend. This might be a good time to defer a major purchase. This may allow you to pick up shares at a discount, or at least avoid selling them low.
You can learn a lot about yourself in a bear market, but it’s most critical to avoid big mistakes, like panic selling.
DR. DAHLE blogs at https://www.whitecoatinvestor.com and is a best-selling author and podcaster. He is not a licensed financial adviser, accountant, or attorney and recommends you consult with your own advisers prior to acting on any information you read here.
