The Difference Between a Correction and a Bear Market
What is important about this topic? Knowing the difference between the two could greatly effect your retirement assets.
There must be nothing worse than trying to understand how money works and at the same time understand money jargon. What is worse (and I am guilty of this sometimes) as members of the financial advisor community we have the tendency to over complicate things. One of the initiatives of this space is to educate in terms that everyone can understand. What is a correction versus a bear market? This is important for you to understand to the degree that you can be aware of it. Simply put, a correction occurs when the stock market declines 10% to 20% and stops and then recovers. Say you had 100,000 dollars and the market declined 15%. Your 100,000 dollars would now be worth 85,000 dollars. However, if it is a correction, then it would start the process of gaining back the loss of 15,000 dollars and start gaining again.
Corrections are normal in the grand scheme of things. As a stock market investor, typically you ride that out unless you are investing from a strategic standpoint.
Now a bear market is a different animal. This is when the market drops in excess of 20% and continues to drop over a period of time. In this article, Paul Merriman gives some interesting statistics about bear markets. Here are a few of statistics:
- Since 1929, the U.S. stock market has experienced 25 bear markets, an average of one every 3.4 years. (it has been 9 years since one has occurred)
- The average bear-market loss was 35%. The smallest loss was 21% in 1949; the worst was a drop of 62% from November 1931 to June 1932. (I might that between 1929 and 1932 the Dow Jones declined 86%)
- Many of today’s investors have lived through two fairly nasty bears: a decline of 58% from 2000 to 2002 and a 57% plunge from 2007 to 2009.
If we are in a correction, this should "correct" itself and get back to investors gaining again. If we have started a bear market, then that is a different story. That is when you need to invest differently. How do you do that?
This is one of the reasons I am hosting the Investing in Uncertain Times Webinar on May 17th and May 19th. I am going to go through these concepts to show you how to invest in uncertain times. The challenge is that there is much evidence that would suggest that this is a correction as much as there is that this is the beginning of a bear market. In this webinar I will show you the clues and what steps to take. To register, click HERE.
Think of it as a the development of a hurricane. A hurricane can start out as a category 5 hurricane and be hit the shore as a tropical storm. Consequently, a hurricane can start out as a category 1 and grow to a category 5 and destroy the shore. The question is - are we looking at a tropical storm or a category 5 financial storm that lies ahead?