Periodic sell-offs are an undeniable fact in the stock market, and they range in severity from occasional-but-savage bear phases to much more common one-day setbacks.
Not only are these events hard to predict but they can also have miserable consequences. Even a brief pullback of just a few percent can be enough to cause panic if you’re unprepared. In these moments, the human instinct is to fight or flee. But when you’re scared out of your wits it’s not always easy to make solid financial decisions.
At worst, the emotional turmoil results in selling and taking a loss on the way down and then being psyched out of buying back (and missing the gains) as the market recovers. Timing trades in and out of the market can be a humbling experience when you’re acting on instinct.
The unforeseeable size and duration of market dips - and the uncertainty they cause - is generally why most investors are urged to think long term and have a plan for all events.
Multi-year time horizons and good planning can help smooth the impact of bear markets and make the intermittent single-figure “corrections” easier to live with.
In fact, with the right plan, a correction can offer the chance to buy positions that might otherwise have been out of reach. In this article we’re going on the offensive by looking at the factors to think about when it comes to finding opportunities in a sell-off.
Grappling with the bear
On most measures, stock markets reach ‘bear territory’ when they fall by 20 percent or more. These kinds of major pullbacks are rare but inevitable.
In the US, which accounts for more than 50 percent of the ‘global’ equity market, there has been a bear market every 3.6 years on average since the late 1920s. Those gut-wrenching phases each lasted an average of 9.6 months, but the timings vary a lot.
For instance, both the dotcom crash of 2000 and the financial crisis of 2007-2008, led to bear markets lasting longer than a year. It took another 11 years for the next one to come along, which was the Covid-19 crisis. Unlike its predecessors, that crash was followed by a recovery that only took a few months.
While bear markets are perilous, a much more common challenge for investors is dealing with “corrections”. Technically, corrections are when the market…
