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Strategies

Big stock gains have always been followed by big losses. Here are tips on how to prepare.

Credit...Alex Nabaum

Nov. 7, 2025, 9:00 a.m. ET

The higher the A.I. bull market goes, the more nervous I get. So I’ve been thinking about whether I’ve protected myself sufficiently for a crash.

This isn’t because I’m predicting an imminent market crisis. Not at all. Despite warnings from prominent bank executives and hedge fund managers that the stock market has gotten too high, I believe the frenzy for artificial intelligence — and for stock riches — is likely to keep the market moving upward for a while.

Fabulous wealth is being generated in the stock market. Nvidia, at least briefly, reached a $5 trillion total market valuation. Microsoft topped $4 trillion. So did Apple. The numbers are so big, they are hard to comprehend.

They reflect stock prices that strike me as excessive. Sooner or later, the market will take a serious plunge. Stock markets always do. President Trump’s deliberately disruptive policies have only heightened that risk.

As a long-term, low-cost index fund investor who has already benefited from decades of an upwardly trending stock market, I’m not abandoning stocks. I resolved long ago to stick with the market, and that decision has paid off.

But I’m reviewing how much I’ve got at stake — how much in stocks and how much in bonds — and assessing what the effects would be for my overall investments if stocks were to plunge as deeply as they did in the four U.S. bear markets since the start of 2000.

The question is whether I’m sufficiently diversified, and hold enough bonds and other assets, after the big run-up in stock prices.

It may seem perverse to be concerned about potential market losses during a period of remarkable gains. After all, if you have owned an S&P 500 index fund since the start of the current bull market on Oct. 12, 2022, you have doubled your money.

But terrible stock market declines happen with shocking regularity. Diversification , or owning a variety of assets, has helped to ease the pain in the past. When the stock market is better than expected, it’s worth remembering how bad it could suddenly become.

The Dark Side

Bear markets are conventionally defined as price declines of at least 20 percent, from top to bottom. There have been many of them: 15, for the S&P 500 and its predecessors, starting with the crash of 1929, according to a tally by Howard Silverblatt, a senior index analyst for S&P Dow Jones Indices.

Those were all painful episodes. Since 2000, the bear market set off by the financial crisis of 2007-8 was the worst, in terms of total losses. The S&P 500 dropped 56.8 percent, from top to bottom. That horrible stretch started on Oct. 9, 2007, and lasted 17 months before ending on March 9, 2009, according to Mr. Silverblatt.

What made it even worse was that it came only five years after another, more protracted bear market — the dot-com crash of the early 2000s. That decline lasted 30.5 months, from March 24, 2000, to Oct. 9, 2002. The S&P 500 fell 49.1 percent from top to bottom.

Between the two crashes, there was a bull market, in which the S&P 500 index rose 101.5 percent. That’s a tremendous number, except for a basic math problem that affects all bear markets. When stocks decline 50 percent — as the dot-com bear market almost did — they must rise 100 percent to get back to where they started. (If you began with $100 and lost half of it, you needed to double your remaining $50 to return to $100.)

Investors who stuck with the S&P 500 index after the dot-com crash were still hurting a decade later. The numbers are sobering. Those unfortunate enough to have bought S&P 500 index funds at the March 2000 peak were sitting on a loss of 8.3 percent, including dividends, a decade later, according to calculations I ran on FactSet.

That didn’t happen in isolation. There were also two recessions in the course of those two market downturns. Entire industries were battered. Millions of people lost their jobs. Those entering retirement or already in it endured grievous setbacks.

Could something that bad, or worse, happen now? Yes, of course. And far worse has happened in the U.S. stock market, when you go back as far as the Great Depression of the 1920s and 1930s. Using inflation-adjusted data, Robert Shiller, a Nobel laureate in economics, found that it took 29 years to recover from the stock market crash of 1929.

These kinds of stories become ubiquitous during severe downturns. Focusing on them could scare you away from the stock market entirely, but I think that would be a mistake, too.

Pain and Gain

Sticking with the stock market for the long run has been the secret of investing, hidden in plain sight. As I pointed out this summer, over 60 years, the S&P 500 generated a return of 38,881.17 percent. That means that $1,000 invested 60 years ago would have been worth about $390,000 in late June — as long as you stuck with it, even through terrible downturns.

The U.S. market has been good over many shorter, but still lengthy, periods. Just go back to the start of 2000. Despite four bear markets — in 2020 and 2022, in addition to the two in the first decade of the century — the S&P 500 in this period has returned 8.1 percent annualized, with dividends — for a total gain of 652 percent.

By contrast, bond investments look paltry. The Bloomberg U.S. Aggregate Bond Index, a benchmark for investment grade bonds, returned only 4.1 percent, annualized, for a total gain of 181 percent.

So if you didn’t care about those stretches of stock declines, you would have been better off just owning the stock index fund — or, if you were prescient enough to pick the best stock in the market, just going with Nvidia. That stock’s gains since the start of 2000 make nearly all the others look insignificant: 34.9 percent annualized, or 230,607 percent cumulatively.

Yet it would have taken a stronger stomach than I possessed to have survived a naked investment, with no protection at all, either in the broad stock market or in a stock like Nvidia. In one 11-month stretch starting in Nov. 11, 2021, for instance, Nvidia lost more than 60 percent of its value.

That’s why I cling to bonds and other less exciting holdings, like bank deposits and money market funds, and why I’m looking at them closely now.

Searching for Safety

In most, but not all, bear markets, investment-grade bonds have been a blessing.

For example, in the decade starting March 24, 2000, encompassing two bear markets, the S&P 500 was down more than 8 percent, but the Vanguard Total Bond Index fund returned 79.8 percent, for an annualized 6 percent. It was wonderful to have owned bonds then.

Bonds haven’t always provided that kind of protection, though. Take the bear market of 2022. The value of bonds fell along with those of stocks. That’s because inflation soared and interest rates rose. (Interest rates, or yields, move in the opposite direction of bond prices.) At the moment, thanks in part to Mr. Trump’s tariffs, inflation is still running at an uncomfortably high rate, so the outlook is uncertain for bonds. With a government shutdown underway, insufficient public data for clarity, rising government debt and an embattled Federal Reserve coming under pressure from the Trump administration, it’s possible that inflation will rise sharply again.

Treasury bills (with a duration of one year or less) and money market funds have excelled in the last few years, as I pointed out last week. While their yield has dropped below 4 percent, money market funds are still producing an annualized return over 3 percent, which could move higher if inflation flares again and rates rise. Under such circumstances, while government inflation-protected bonds would be havens, core bond funds would be hard-pressed to produce positive returns.

Then again, the remarkably resilient economy could falter, which would push interest rates lower, bolster bond returns and hurt money market funds and Treasury bill rates. For greater margins of safety in a severe downturn, bank savings accounts covered by the Federal Deposit Insurance Corporation would be preferable to uninsured money market funds.

I don’t know where the economy is heading or how long the stock market will rise before its next big reversal. The old 60/40 portfolio — with 60 percent stock and 40 percent in high-quality bonds — is a traditional compromise between risk and safety. I include some short-term funds within that 40 percent fixed-income allocation. And I invest globally because the outstanding performance of the U.S. stock market may not last.

If you’re going to take the risk of investing in stocks — particularly during a stock market rally that seems to have been swept by excessive enthusiasm — it’s critically important to be ready for setbacks, even severe ones.

On a stock chart covering many decades, bear markets have looked like minor blips on a long ride upward. But try to figure out what you will be able to handle before the stock market’s intoxication with artificial intelligence ends abruptly.

Jeff Sommer writes Strategies, a weekly column on markets, finance and the economy.

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