When investing, especially if you are investing in stocks directly, seeing the market go down might wreak havoc on your sleep. But it’s useful to know the difference between the different types of situations so that you will have better decision-making.
According to Institutional Investor in 2022, since 1945, the S&P 500 has experienced 86 pullbacks, 28 corrections, and 12 bear markets.
*Pullback*
The market drops about 5-10% and is short (likely weeks). A dip from a previous high in a rising market and the sentiments or outlook of the upgoing bull run don’t change. This is a typical adjustment to a market cycle. Remember, it doesn’t change the market outlook. As above, S&P500 has experienced 86 pullbacks since 2022. (So many!!)
*Correction*
People like to bandy the phrase ‘correction’ when the market moves down. Correction here happens only after a drop between 10-20% and can last a few months. Correction tends to be a bit “stronger” as investors who are fearful might start to panic sell. Remember herd mentality, you sell, I sell? Perhaps we should read more into the markets to not make bad decisions. Perhaps it might be ideal to accumulate more during these times. As above, S&P500 has experienced 28 corrections since 2022.
*Bear Markets*
The market after a drop of 20+% over at least a two-month time frame is called a Bear Market. Here, mayhem happens, investor loses confidence in the market and will dispose of their holdings and the market falls further. On average, these markets might last up on average 12-18 months. As above, S&P500 has experienced 12 corrections since 2022.
*Bulls Chase the Bears?*
Once the reversal happens after a long-languishing of the markets, we start to see highs. The bear market is over, and the bull has taken charge.
The lesson to learn is that the market rewards the patient investor. (I know it’s hard). However, I venture to say that the market rewards the patient and strategic investor (is this even harder?)
If you do not want to spend all your time monitoring direct stocks, why don’t you have a portfolio of indirect stocks in a fund which is managed by fund managers? If you are keen to explore that, we at FinAIMS would be more than glad to explain our fund selection choices to you before you make a sound decision. Looking forward to hearing from you.
