Correction, Crash, and Bear Markets – Explained

Correction, Crash, and Bear Markets – Explained

There are two things that I always make sure I talk to my clients about when we get into investing:

1. Market declines are normal and to be expected
2. We’ll stay invested when we’re experiencing it

When a market declines, it feels horrible and it also feels counterintuitive to not sell everything and sit on cash, but think about it this way, when the value of your home drops is that when you rush out to sell it? Of course not, you hold on to it until it goes back up; and this is what investors do. In a previous blog, Difference between investors and traders, I talked about the differences between an investor and a trader, and since we’re investors at RADIANT Wealth Planning, we won’t sell during these times as long as the investment remains to be a solid quality investment.

Let’s talk about the different types of drops you may have heard about, and those are corrections, crashes, and a bear market.

A correction is a 10% drop from the most recent high that happens over days, weeks, or months. If this 10% drop happens in 1 day that’s called a crash. And when there’s a 20% drop from the most recent high that’s called a bear market. 

When people experience these drops, especially when we go into the bear market territory, this is when fear kicks in, and people want to sell and hang out until the market starts going up again. If this resonates with you, I hope that by the end of this article I can convince you to re-look at your strategy now, so that you know how to react when you’re feeling uneasy. 

Putnam put together this document, which I’ve seen get updated yearly, called Don’t miss the market’s best days which is exactly what it sounds; it’s the impact of missing the market’s best days. It’s a powerful visual because it takes the emotions out of it and shows us the raw numbers.

What these bars are saying is that if we started with $10,000 on December 31st, 2004, and held it till the end of 2019, we would have $36,418. But if we missed 10 of the best days in these 15 years, that’s only 10 days out of 5,475 days, we would have $18,358. It’s still more than the initial investment of $10,000, but that’s half of what we would have had if we just left the money alone. And no one can look forward to the next week, or next month and know which day will be phenomenal, that’s something that we can only know looking in the past.

RADIANT Wealth Planning, LLC is a fee-only financial planning and investment management firm located in Newport Beach, CA