• Aaron Wassenaar

Understanding market downturns

For prepared investors, market downturns can represent great opportunity

Nearly everywhere you turn, from friends and colleagues to cable news shows, you can find someone with a strong opinion about the financial markets. People will often use specific terms, such as correction or bear market, to render judgments about the direction of markets, especially when market performance is choppy or trending down.

Is it worth getting concerned when markets stop or even reverse their upward advance?

To answer that, it’s important to realize that downturns are not rare events: Typical investors, in all markets, endure many of them during their lifetimes. Even knowing this, it can be unsettling to witness the decline of your portfolio during one of these events. After all, that account balance is more than a number—it represents very important personal goals, such as the ability to retire comfortably or to provide a quality education for family members. When market conditions jeopardize those goals, you may feel compelled to do something, such as sell most of or all your investments.

You may assume that converting to cash will give you a better long-term result than staying invested. But such action would shut you out of the strong recoveries that have historically followed market downturns. The answer is to come up with a game plan before the next market pullback, so you’re well-positioned to try to take advantage of the opportunities that follow. What’s more, you’ll probably know what to expect as markets cycle through their phases, so you can tune out messages that don’t help your strategy.

Since 1980, there have been:

20 corrections (declines of 10% or more)

9 bear markets (declines of 20% or more, at least two months long)

5 recessions (declines on economic conditions for two or more successive quarters)

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