This is an important question. It is also one that is taken very lightly by pop culture finance. They will tell you that it is always a correction, and never even remotely entertain the possibility of a bear market. Once there is no denying that it is a bear market, pop culture finance starts focusing on the predictions of when it will be over.
Let's start with some definitions – a correction occurs when a bull market stops going up, and declines between negative 10% and negative 20%. Then the market rebounds and continues the bull market. Thus, the bull market was never over. A bear market is when the market drops more than 20% from the bull market high. The last two bear markets lost a - 45% to - 55%. When the bear market is confirmed, the bull market is officially over.
Now, we can get into a debate as to what really constitutes a bear market. We can debate how long it will take, and we can debate how steep the losses would be. We can even debate whether or not a bear market took place. One thing for sure is that the accepted definitions of a bear market and a correction are very outdated and do need to be adjusted. The most important takeaway is that a bear market is damaging to the point that everything changes, including where you are in regard to your financial goals. Think of it as a category four or five hurricane hitting the city where you live.
So, what do you do?
Well, if it is a correction, it should be over soon enough. Hopefully, your risk level matches your current investment strategy. If it is a bear market, then you might consider switching from what you're doing, or your plan “A” investment strategy, to a Plan “B” investment strategy. You need a Plan A for when the market is going up and a Plan B for when the market is going down. Unfortunately, Pop Culture Finance doesn’t support the notion that you even need a Plan “B”.
For more information about building a plan B strategy, check out this teaching video:
Bob Brooks is a Financial Advisor and Host of the Prudent Money Radio Show. To inquire about Bob’s services send an email to info@prudentmoney.com
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