Bull Markets end in euphoric conditions, Bear Markets end in despondency - both reflective of the value that the market places on any form of business, real-estate or tangible goods. Bear market investing is an extremely tricky proposition where the first focus has to be on protecting your investments, and secondarily on growing them in tough times. It is appropriate to be a little afraid during bear markets, for it is difficult to fathom how low any given investment will go - as the sentiment around value, and the risk-taking appetite of investors falls off a cliff.

However, when the fear and pessimism hit an extreme, and there appears to be no hope, know that you are close to the bottom - and a powerful bull market is born out of such despondency. If at this stage you are sitting on a mountain of cash, you can use it to buy many quality businesses and commodities at extremely depressed prices and ride them to a multi-generational fortune. It is important to note that such opportunities occur periodically, and one must be prepared to take advantage of the same. Thus, the first lesson of a bear market is - protection of your assets.

Even if you are looking to actually invest during the tough times that accompany a bear market, make sure that the majority of your money is deployed in safe assets such as short-term Treasury bills or simply in CDs or in straight cash. For 95% of retail investors, almost all the assets should be in such short-term safe instruments. It is also useful to have a very small amount put away in physical gold and silver, in preparation for the unlikely event of a complete financial meltdown - at which time gold and silver are likely to rocket up in value and at their peak, could be exchanged for very high amounts of the local fiat currency.

If you choose to invest during a vicious bear market, be prepared to work with volatility in the markets. The function of a bear market is to take down as many folks as it can with it, so that only extremely patient investors (strong hands) are left - which then leads to the birth of a new bull market. Bear markets achieve this by frequently interjecting ferocious rallies to the upside, snaring unsuspecting investors into investing too much, too soon. Short-sellers are especially prone to getting caught naked during these rallies. Thus while short-selling seems to be a simple way to make money during a bear market, it is however a quick path to bankruptcy if you are not a full-time trader.

Bear market funds on the other hand, let you leave this task to those who indeed do short the market and work on it full-time. Such funds are expensive, and do not always easily rise in correlation with a fall in prices. This is so because the fund managers realize the risks involved in a bear market and frequently buy insurance on their positions through options and investing long in select stocks - all to cushion any serious blow to their short positions.

Another option is to invest in bonds, which sometimes move opposite to stocks in a bear market - mostly because there is an expectation of a decrease in interest rates from the Federal Reserve in the US or ECB in Europe, resulting in a rise in value of bonds. This strategy works reasonably well in many situations, however, the bond values adjust rather quickly in anticipation of such a change, and it is difficult for the retail investor to react fast enough to take advantage of this rise in value.

Investing long in stocks that may be negatively correlated with the rest of the markets, perhaps in mining shares of commodities or precious metals, may offer yet another mechanism to grow your portfolio during a bear market. The success of this technique depends on the breadth of the bear market. In a broad sell-off, no sector is spared, and you will lose money on all investments. In such a situation, protection is the only recourse. At other times, the strategy in investing in negatively correlated situations will pay off.

Given the above, the best chance for a retail investor is asset allocation with regular rebalancing. This way, you are always invested in each part of the market, and are periodically moving money out of the best performing areas to the least performing ones. Given that bull markets tend to last 3-4 years and bear markets 12-18 months, annual or bi-annual rebalancing will ensure that the stronger sectors get a sufficiently long period of time to help your portfolio. Then when the markets turn, the weaker sectors may suddenly outperform and grow your portfolio.

Diversification and asset-allocations thus become easy friends for most investors who are looking to grow their portfolio in bull and bear markets.