With the recent market volatility, we are getting questions during our review meetings about key terms such as a market pullback, correction, bear market and recessions. The news stations use these terms as if they were part of our common vocabulary, but for most investors, they can be a bit confusing.
Below you will find the definition of these terms, which will provide a bit of perspective.
A pullback represents the mildest form of a selloff in the markets. You might hear an investor or trader refer to a dip of 5-10% after a peak as a "pullback."1
The next degree in severity is a "correction." If a market or markets retreat 10% to 20% after a peak, you’re in correction territory. At this point, you’re likely on guard for the next tier.2
In a bear market, the decline is 20% or more since the last peak.2
A recession is a macroeconomic term that refers to a significant decline in general economic activity in a designated region. It had been typically recognized as two consecutive quarters of economic decline, as reflected by GDP in conjunction with monthly indicators such as a rise in unemployment.4
All of this is normal
"Pullbacks, corrections, and bear markets are a part of the investing cycle."
When stock prices are trending lower, some investors can second-guess their risk tolerance. But periods of market volatility can be the worst times to consider portfolio decisions.
Pullbacks and corrections are relatively common and represent something that any investor may see from time to time in their financial life, often several times over the course of a decade. Bear markets are much rarer. In fact, between April 1947 and September 2021, there have only been 14 bear markets.3
At Reed Financial Planning Services, we understand that these market events are a normal part of investing and help our clients plan for the next market decline. We always tell our client's "It's not if the market turns, but when it does, we will have a plan in place so we know where your income will come from. " This often means understanding your annual income needs, your various sources of income (work income, social security and/or pensions) and an anticipated annual drawdown on assets. We then invest with purpose in a well-balanced portfolio, which allows us to take income from various sources and to ride out these periods of market volatility.
If you have questions about what's happening in the market and how it may impact your ability to retire, please click on the link below to schedule your complimentary phone consultation.
1. Investopedia.com, August 23, 2021
2. Forbes.com, September 20, 2021
3. Investopedia.com, October 29, 2021
4. Investopedia.com, Marth 25, 2022
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