When markets fall, it can be unsettling. It's easy to lose sight of the fact that downtrends are a natural part of the investing cycle. During these times, you may hear various terms thrown around to describe the market's behavior, and understanding them can help you keep perspective.
Common Terms for Market Downturns
Pullback: The mildest form of a market drop, a pullback refers to a decline of 5% to 10% from a recent peak. Pullbacks are relatively common and can occur multiple times throughout the year. They often represent short-term reactions to news or economic data and are typically followed by a market recovery.
Correction: When you hear the term "correction," it means the market has dropped 10% to 20% from its most recent peak. Corrections can feel more significant and may lead to concerns about the direction of the market. However, they are also a normal part of the market cycle and often provide opportunities for long-term investors to buy assets at lower prices.
Bear Market: A bear market is the most severe of the three, characterized by a decline of 20% or more from the market’s previous high. Bear markets can last for months or even years, often occurring during periods of economic recession or widespread financial uncertainty. While bear markets can be challenging, they eventually come to an end, and markets have historically rebounded strongly.
The Importance of Staying the Course
When prices are trending lower, it’s natural to second-guess your investment decisions. You might find yourself wondering if this time is different or whether you should take action to protect your portfolio. However, reacting emotionally to market downturns can often do more harm than good.
We’ve aligned your investment strategy with your long-term goals, time horizon, and risk tolerance. Your portfolio was built with the understanding that markets will experience both good times and bad. By sticking to your plan and maintaining a long-term perspective, you position yourself to benefit when the market eventually recovers.
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