By Arjun Chandrasekar.
Summary
Market downturns, or recessions, are some of the most fearful events that take place in an investor’s journey. Many short-term investors have to constantly worry about massive declines in the value of their assets; long-term investors, however, usually don’t have to worry too much, as the market will definitely experience a rebound. It’s important to not panic when events such as this occur, as all economies go through similar cycles and there will always be growth afterwards. But you should be prepared for it, and be ready to change your normal investing strategies.
Generalized
Market downturns can last anywhere between a couple of weeks, months, or in some cases, years. The market becomes bearish for a certain period of time, but generally tends to rebound up after. Investors usually invest based on emotion rather than critical thinking, and it’s easy to make mistakes without even realizing it. When the market becomes bearish, investors begin to panic; their first thoughts might be that they should immediately sell their holdings to prevent money loss, or they should wait and buy the dip. With many investors choosing to sell all their holdings, the market declines even more. So you can imagine what this continued cycle of selling and declining leads to… a recession! This is why investors shouldn’t always worry when the market seems bearish, as it could just be a temporary market dip.
Market Dip and Correction
So we covered what a market downturn is, but there are 2 specific terms that people often confuse, a market dip and a market correction. Let’s briefly go over them. A market dip is a temporary decline due to current event influences. The key word is temporary, meaning it will soon rebound and there is no need to panic. A market correction is when prices drop exactly 10%, and they are usually followed by a bullish market. Although these events are unpredictable as they depend on numerous uncontrollable, outside factors, investors shouldn’t panic and sell all of their assets because the market will eventually rebound, cancelling any losses they might have experienced.
Conclusion
In short — the main idea we want you to take away is that when you see any sort of price decline in your stock holdings, a) don’t panic, and b) don’t sell. Normally, these experiences are worrisome due to your desire to make money; however it’s almost guaranteed that the market will rebound and the cause for the initial decline was a temporary social or economic event. These situations are bound to occur, and it is important to maintain patience and strategize properly.
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