Daily fluctuations in the stock market can turn profits into losses at a moment’s notice, and vice versa. To get a better idea of the stock market’s performance and growth (or lack thereof), you should look at a longer period, like a few years or a decade.
Indexes are used as benchmarks to gauge the movement and performance of market segments.
In India, Sensex is the benchmark index and provides a gauge of India’s economy.
What is a Market Correction?
What is a bear market?
What is the difference between a market correction and a bear market?
Do market corrections lead to a bear market?
What should you do when there is a Market Correction?
Read through to discover all the answers and also be aware of the dos and don’ts during a market correction.
First, let’s look at Market Correction.
A market correction is usually defined as a decline of 10% -20% of an index from its most recent peak. Many factors can trigger a correction viz. macro-economic factors, overheated market, etc.
An index may fall into correction either briefly (days & weeks) or for a sustained period (months & years). This may lead to panic stations for many investors.
We should understand that it is just an indication of a potential reset.Now that you know what a market correction is, let’s see what a bear market is.
A bear market is a period where markets decline by 20% or more. It can be short-term (a few months) or long-term (a few years).
A sluggish economy, bursting market bubble, war & political unrest may trigger a bear market.
Herd behaviour, fear, and a rush to protect downside losses can lead to prolonged periods of a bear market.
Now let’s see the major difference between a Market correction and a bear market.
A correction is just a cyclical event whereas a bear market is deeper & has a greater impact.
In a correction, investors are still optimistic but, in a bear market investor sentiment is more negative. Nobody can predict whether a correction can turn into a bear market or get reversed (bull).
Historical data depicts that not all the corrections have turned into a bear market. Let’s analyze the past market corrections.
Below is a bar diagram that shows the market corrections and the bear markets.
From the above bar diagram, you will find that there were only 4 market corrections that have become bear markets (the red bars) from the year 1991 to 2022.
And below is a tabular column that shows the dates of the bear markets, the reasons for the bear markets, and also the percentage of change in the bear markets.
When historical data is analyzed, there have been 22 market corrections (> 10%) since 1991, and only four of them became bear markets (>20%), in the years:
Now let’s take a look at the Sensex days up and the down percentage.
Sensex Days up Vs. Down percentage (1991-2022)
Up days – 53.13%
Down days – 46.87
“Prepare yourself to face the market correction, market crash, and recession. Then invest.”
Now you would have understood that not all Market corrections lead to bear markets. So what is that you should do when there is a Market Correction? Let’s find out.
The answer is not to react but respond when there is a market correction.
How is it done?
The solution is right here below.
For eg: There is a stock market crash and you stop your SIP. This is a reaction that should not be allowed.
So how should you respond?
Respond by staying invested and practicing discipline.
Far more money has been lost by investors preparing for corrections or trying to anticipate corrections, than has been lost in corrections themselves. –Peter Lynch
There are 3 Crucial lessons to be learned from the past stock market crashes. Want to discover them? Watch the video below.
What else should you be doing when there is a market correction?
No bear market runs forever. the Bear market slump is short-lived compared to the bull market rally. Decide according to your investment plan / financial plan. Don’t allow panic to sway your decision. Stay the course & reap the advantage when the market recovers.
It’s better to ask an opinion from your financial planner since this fund is subjected to high risk.
If you have any comments or questions, write them in the comment box below.
If you have any comments or questions, write them in the comment box below.
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