Do You Know the 3 Types of Market Downturns?

As 2019 unfolds, there are many eyes on the market; many of them are wondering whether the low point experienced at the end of 2018 will prove to be a bottom or a precursor to more hard times to come. Regardless of what you read in the headlines, history shows that maintaining consistency tends to lead to the highest chances of success.

Building knowledge of some key market terms related to shifts may also help boost your confidence. Here are some points that can help:

There are three kinds of downturns. As we talked about in our recent quarterly reflection piece “As We See It,” there is a common approach to how downturns are typically categorized:

  • A pullback is when the market experiences a decline of 5.0% to 9.9%. They typically last about a month, on average, and require about two months for the market to recover.
  • A correction is a decline of 10.0% to 19.9% and its average duration is five months, but requiring only an average of four months to recover.
  • A true bear market is the most formidable, with dips in the market of 20.0% or more. These events last 17 months, on average, and can take around three years for recovery to be complete.

This is where focused, diligent investing requires the discipline to turn from the hype of the media and Wall Street. Whether it’s the start of a bear market or simply a pullback, the tone of the media during a pullback could make you believe the sky may be falling. In reality, this John Rodgers, Jr., quote can help you see the big picture: “The most important thing is to stay the course — not to get shaken out of the market during a difficult time.”

Take an opportunity to think small at times. As you follow a consistent set of principles regarding investment guidance and strategy, you often notice trends that would never make the headlines. For instance, Lawson Kroeker often invests in firms that are listed in the Russell 2000 index. It’s worth noting that the smaller firms in this index tend to have downturns that are less distinct; may last even half the time of the bigger firms; and can recover much more quickly.

Keep looking forward: Categorizing a downturn in the market requires the perspective of history, regardless of what’s being reported in the news. Rather than looking behind, it’s important to continue to look forward. Keep pursuing consistent goals using principles that have led to success over time.

For more investment insight, contact us at Lawson Kroeker. You will find that our firm is different for many reasons  and that we value a “contrarian” approach. Let’s talk today about remaining true to focused, long-term investment solutions that help you make your money last. (If that makes us a little “old school,” we are alright with that, too.)