Holding cash in case a bear market hits? Here's where and when to invest if stocks plunge.

• Deploying cash during a bear market can be difficult as fear sets in.
• It's smart to have a plan — don't enter the market all at once, and don't panic.
• Experts suggest buying quality dividend stocks and large-cap tech if a bear market comes around.

If you've been building up a big cash reserve over the last few years, you're not alone. You're also probably not alone in wishing you'd had the money in stocks.

Cash has generated meaningful yields since 2022 after the Federal Reserve went on a rate-hike spree, drawing record amounts into money market funds.

The total value in money market funds — highly liquid, cash-equivalent assets that generate yield from short-term bonds — is at a record $7.3 trillion. About $2.1 trillion is held by retail investors. Even stock-investing icon Warren Buffett holds a record cash position worth nearly $350 billion as of March.

But stocks have ripped higher in the meantime. The S&P 500 is up 80% since its October 2022 low. It's been difficult to know when to get into the market, though. With the stock market consistently hitting new highs and valuations historically elevated in recent years, you might have been waiting for a good opportunity to put that cash to work in equities, waiting for a dip to buy. If you missed the April plunge, you might still be doing so.

It's not necessarily a bad approach. Goldman Sachs said this week that the chance of a stock-market pullback has jumped. In fact, stocks are so expensive that Vanguard said this mont that its ideal portfolio over the next 10 years is a very conservative allocation of 70% bonds and 30% stocks. The cheaper the entry point, the better the returns.

But timing the market is tricky and something market pros usually advise against trying. No one knows how long a bull rally can go or how long an eventual pullback will last. That's why the best course of action is probably to dollar-cost-average, continuing to put money into the market at set intervals, whether the market is up or down.

However, if you are resolved to waiting for a significant decline to enter the market, it's a good idea to have a plan set in place before that moment arrives.

When and what to buy

Though bear markets in recent years have been short-lived, the average bear market going back to 1932 has seen a 35.1% drawdown that lasts a year and a half, according to investment bank Stifel.

So take it slow, says brokerage firm Charles Schwab.

"Instead of going all in at once, one might consider buying small chunks at a time," Charles Schwab said in an August 6 post.

But not too slow, said Hank Smith, the director and head of investment strategy at Haverford Trust. There's no way to tell when the bottom is in, so you want to start taking advantage of the pullback once it hits 10% correction territory, he said.

It may hurt if the market ends up falling further than 10%, Smith said, but being indecisive about when to get in can result in missed opportunities. Remember the 19.9% decline in the S&P 500 from February to April? The pain was over in the blink of an eye, with the index back at all-time highs before the end of June — and the rally has been furious, with the market up 30% since April lows.

So if the market does continue to drop, it's time to get even more aggressive, Smith said.

"Let's say that correction morphs into a bear market of 20%, and now you're kicking yourself that you put any in at down 10%. You can't do that," Smith told Business Insider. "You have to say, 'Ok, this is another opportunity to tranche in again,' and probably with more than you did at down 10%."

As for areas of the market to buy, it's difficult to know which sectors and themes will get beaten up the most.

But Schwab said it's good to take a diversified approach and start buying all corners of the market.

"Interestingly enough, traders can diversify their portfolios with as few as 12 stocks, targeting stocks in all major sectors," the firm said. "Although diversification doesn't eliminate the risk of experiencing investment losses, it can help increase the chances of capturing better-performing assets and avoid the risk of losing overall portfolio value to any single business, industry, or sector."

Quality dividend stocks can also provide a good buffer to market losses, Merrill and Bank of America Private Bank said in a 2024 report.

Smith said that economically sensitive sectors usually make for some of the best opportunities coming out of a recessionary bear market, as they dip during downturns and rebound when the economy recovers. Funds like the Fidelity MSCI Consumer Discretionary Index ETF (FDIS) and the Invesco Dorsey Wright Consumer Cyclicals Momentum ETF (PEZ) offer exposure to cyclical stocks.

But he also said large-cap tech stocks are likely to drop the most because of how high their valuations are. If that's the case, it will likely be a good chance to add exposure to them, he said.

"That's very common in high-growth stocks to have big sell-offs in what is a longer-term bull trend," Smith said. "That is where an investor with a lot of cash waiting for a significant decline in the market should look to."